Television commercials and mass mailings may make debt consolidation seem like a simple process. Often by the end
of a 30 second ad, the formerly anxious, debt ridden consumer is smiling and shaking hands with a caring debt consolidation
counselor, and all their problems seem to have vanished.
While there are many options available
to consumers, the three most commonly advertised forms of debt consolidation are: credit counseling, debt management programs,
and debt settlement. Consumers sometimes mistakenly assume that these options mean the same thing, involve the same process,
and are interchangeable. This idea is wrong on all accounts.
Credit Counseling is often the first
stop for those interested in eliminating debt. It is simply professional help to develop a budget, encourage discipline, and
reevaluate spending. This is a good option for people who have a steady income, and have just made some poor financial decisions.
Counselors
offer advice and explain your options, however, they do not cut your monthly payments, or reduce the amount you owe. They
can contact creditors to lower interest rates, but you can do that yourself. Most importantly, credit counselors can help
you to know when declaring bankruptcy is your best option. It is now necessary to meet with a certified credit counselor for
six months prior to declaring bankruptcy.
Debt Management Programs are the way that credit counselors
help to pay down your debts. They take one monthly sum, and redistribute it to cover all your bills. Basically, the counselor
takes your paycheck, keeps what is needed to pay your bills, and gives you an allowance. These programs ensure that your creditors
are paid, and you are making progress toward getting out of debt. Only about 35% of all the people involved in credit counseling
qualify for a debt management program.
Debt Settlement is the third option available to consumers,
but experts advise caution when using these types of programs. Basically, consumers make payments to the agency, where the
money will sit until the creditors demand payment. The debt settlement agency will then renegotiate your debts agreeing to
pay pennies on the dollar. The creditors usually agree to these terms, as the alternative is to receive nothing at all.
Frankly,
this is a dangerous, and unethical way to go. First, you are not saving any money, as you make full payments to the debt settlement
agency, who is earning interest on the held money. Second, if you miss even one payment to the agency, oftentimes you lose
all the money you've paid to them as a fee. Finally, it is your credit, not the agency's that takes a beating in the process;
this option can reflect as poorly on your credit score as declaring bankruptcy.
Understanding the
programs available to you is essential as you begin the process of debt consolidation. Credit counseling can be a great tool
in helping to discipline spending, and create a plan for the future--just make sure you know what you're getting into.
Enter
your name & email address to receive your free e-course revealing the inside secrets of debt consolidation (including
when you SHOULDN'T use it to pay off debt):
