Debt Consolidation Programs - Know Your Options

If you’ve made it to this point, you’re going to be confronted with a few different options for handling the debt that’s hanging over you.  So let’s clear a couple of things up:

Debt Consolidation Loans

The terminology can get a little confusing here.  There’s a difference between a debt consolidation program and a debt consolidation loan.   With a debt consolidation loan, you’re actually taking out a loan from a lender (often a loan that’s secured against the equity in your house as collateral) and paying down all creditors and all balances with that money.

You’re then committed to repay that loan, of course, but at a much more inviting interest rate than you had on your credit card balances.

Debt Management Plans

The term “debt consolidation program” is essentially interchangeable with “debt management plan.”  With a debt management plan/debt consolidation program, you’re making one monthly payment to a third party, who has negotiated with the various creditors on late fees and interest.  A DMP can save you the headache of juggling a dozen different bills and due dates each month, and can typically save you money on that monthly outlay.

Tread carefully on this, though; check into the percentage of the payment that goes to the credit counseling service as a service fee.  If it’s higher than 20-25%, you’ll want to keep looking.  Many credit counseling services are fairly cozy with the creditors themselves. Insist on complete transparency with your credit counseling company; if they don’t want to give you direct answers to your concerns or if you feel pressured to “sign on the dotted line,” move on.

Debt Settlement Programs

“Debt settlement” refers to a negotiation with the credit card companies to arrive at lower balances, lower interest rates, lower fees and charges, and hence, lower monthly payments.  You may not even need a third party to arrive at a debt settlement agreement.  In an economic climate that’s the worst in decades, banks and credit card companies are hurting right along with consumers.  

Often times you’ll be able to come to terms with your creditors on your own.  You can probably expect to spend some time on the phone if you take this route, since the phone reps can’t make that sort of decision on their own.  It may be time well spent, though, if you wind up with lower payments.

Debt settlement can have a negative impact on your credit scores; if not, it may still show up on your credit report without lowering your numbers themselves.  It’s generally considered to be a better option than a debt consolidation/DMP agreement or Chapter 13 bankruptcy, however.