Surviving the Debt Consolidation Maze

Debt Consolidation to the Rescue…or Not

The term Debt Consolidation can elicit images of a knight in shining armor saving us from succumbing to debt overload. But don’t be fooled. Debt consolidation isn’t easy. It requires disciplined adherence to the terms of the consolidation plan including not taking on additional debt. Indeed assuming additional debt can be viewed as noncompliance by creditors who are then free to void any agreement and raise interest rates, fees and penalties as they wish. There’s no room for not making the required monthly payments of the consolidation plan and it inevitably has a negative impact on your credit, or FICO, score.

The good news is that, though expensive, debt consolidation will cost less than continuing on the losing path of making minimum monthly payment, or worse, not even making the minimums, and the credit score will be damaged less than by simply defaulting on obligations.

Not all debt consolidation plans are created equal and it’s essential to know the difference in the programs. They all combine debts owed to multiple creditors and allow the borrower to make a single monthly payment but that’s where the similarities end. Though there are variations on names, the primary types of debt consolidation are Debt Management and Debt Settlement. Please become familiar with the differences in the plans. Choosing the wrong one for your situation can be very damaging. It’s worth noting that all of the services we consulted that offer both types of service recommend debt management over debt settlement if feasible. We couldn’t agree more.

Debt Management

With a Debt Management plan, debts are typically paid off much faster than by simply continuing to make minimum monthly payments and the total amount paid in interest is far less. In such a program, the debt management company works to negotiate lower interest rates on behalf of the client and is often able to have penalties like late fees and over limit fees eliminated or reduced. Many creditors are willing to lower the interest rate and fees knowing that it’s far better for them to be getting paid, even at a lower rate, than it is for the debt to go unpaid.

The most important part of a debt management plan is that, when completed, the debt will have been paid in full. That is the most significant difference from Debt Settlement, described below. Once a borrower has successfully participated in a debt management program for about three months, collection calls and notices should stop as creditors see that the debt is being paid systematically.

On the down side, you can expect completion of a debt management program to take much longer than debt settlement. Generally a program will last for three to five years. Also, some future creditors may view the fact that a third party was managing ones finances as a negative indicator. Still, the negative impact on the overall credit worthiness is generally less than results from debt settlement, bankruptcy or defaulting on obligations.