What Is Debt Consolidation?

Debt consolidation involves taking out a loan from a bank or creditor to pay off credit cards, medical bills and other debts. This allows you to make one affordable monthly payment instead of juggling multiple payments every month.

How Does Debt Consolidation Work?

A debt management plan (DMP) can help you become free of debt faster than trying to pay off your debts on your own. A DMP will let you pay back creditors over time while working with a credit counselor who can offer advice about budgeting, spending and money management.

Who Can Benefit From Managing Debts Through A DMP?

Financial experts recommend consolidating debts if you have many different types of unsecured debt -- like credit card bills, utility bills or personal loans -- which are all costing you large amounts of interest each month. A DMP is a great solution if you want to get rid of debt faster, reduce monthly expenses or improve your credit score.

Will Debt Consolidation Improve My Credit Score?

A debt management plan can help you improve your credit rating because fewer collection accounts are reported on your credit report. A DMP can also make it easier for you to qualify for new loans or lines of credit in the future.

How Much Does It Cost To Set Up A Debt Management Plan?

There are no up-front fees to set up a debt management plan with most companies. Your creditors will generally stop trying to collect money from you when they hear that you're enrolled in an affordable payment program like ours. Even better, counselors will negotiate with your creditors so that you only have to pay a fraction of what you owe.

Is It Difficult To Make One Affordable Monthly Payment?

Normally, you will make one affordable payment every month which is divided up and sent out to your creditors according to their terms. You will also receive personalized advice from a highly trained credit counselor in most cases.

How Long Will A Debt Management Plan Take To Complete?

A debt management plan can take as little as 36 months or as long as 60 months (5 years). Each person's financial situation is different, so a DMP can be customized based on your needs and goals for becoming free of consumer debt. 

What Is Debt Settlement, and Should I Get A Debt Settlement? 

Some companies claim that debt settlement will end your debt burden, but here's the dirty truth: Debt settlement is bankruptcy by another name. It may be promoted as a way to free yourself from overwhelming credit card bills, but you're likely to lose your assets -- like your car or home -- and damage your credit score in the process.

What Is Debt Settlement?

Debt settlement, also known as debt negotiation, is when you agree with your creditors to settle your debts for less than what you owe. Why would creditors agree to reduce what you owe if they could get more money from collections agencies? Because many creditors don't want other collection agencies coming after them for payment; it costs too much money to hire them.

How Does Debt Settlement Work?

Debt settlement companies promise that you won't have to pay for their services, but they make their money by getting a portion of the debt amount once it's settled. They tell you to stop paying your bills, which will lower your credit score over time -- impacting your ability to get future loans or lines of credit. These companies encourage you to talk directly with creditors about settling debts instead of working with counselors who are trained to settle the debt in an affordable manner.

What Is The Cost Of A Debt Settlement?

Trying to save money by using these services may end up costing you more than what you would save if you worked directly with creditors yourself. You'll likely miss out on valuable interest and late fees that can be negotiated as well. And some of these companies may charge high fees and ask you to pay for services upfront.

If you're considering a debt settlement, just remember this: If something seems too good to be true, then it probably is. A debt settlement company will likely try to sell you on the idea that they'll negotiate with creditors and reduce what you owe -- but there's no guarantee that your creditor will agree to any kind of settlement deal. At best, this type of program will only hurt your credit score; at worst, it could put assets like your car or home in jeopardy.

What Is Debt Negotiation?

Debt negotiation is when you contact your creditors directly (and individually) and ask if they will accept a lower amount in exchange for your full payment. This is different than debt settlement, which is when you'd pay a third party to negotiate with creditors on your behalf.

Why Is Debt Negotiation A Better Option?

While debt negotiation may seem like the better option, there are also risks involved when you work directly with your creditors. Some creditors may not agree to settle what you owe at all; others might offer reduced balances but still require the full amount of money owed in monthly payments. You'll have to research how much money each creditor can be charged per month if you pursue this option on your own -- and keep in mind that some creditors will charge interest until the balance is settled.

What Happens If I Have Bad Credit?

Debt settlement or debt negotiation can be risky if you have poor credit. However, there are other methods to approach your creditors directly in order to negotiate lower monthly payments. Many experts will say that it's best to find a solution that doesn't involve risking assets like your car or home -- but every person's financial situation is different.

You may also want to pursue bankruptcy if you have little hope of improving your credit score. Reviewing the terms of a DMP versus Chapter 13 may help you decide which option is better for you and your family -- especially since Chapter 7 requires full repayment right away while Chapter 13 allows you to repay debts over time.

What Is A Debt Management Plan?

A DMP, otherwise known as a debt management plan, can actually help your credit score in addition to lowering monthly payments. With this type of program, you'll agree to pay back creditors in full over time. However, the difference is repayment happens through one consolidated payment each month -- so you won't have to worry about missing payments due to temporary unemployment or other financial emergencies. How much money you save depends on the terms of the DMP; for example, some plans require $50 per month while others may request $100.

How To Approach And Negotiate With Creditors

You can contact your creditors directly by phone or mail. If you choose the latter option, make sure to send letters via certified mail so there's no question about whether they were delivered -- and keep copies for yourself just in case. These programs typically last between three and five years, but the terms vary from credit counselor to credit counselor.

How Can I See How Much Money I Owe?

Creditors may provide you with a monthly statement, which will list your current balance as well as how much money is owed in interest and other fees. You can also check out annualcreditreport.com. This website posts all three of your credit reports for free -- so you'll be able to see all the debts reported by each of your creditors.

Conclusion

Debt consolidation is a way to have all your debts combined into one manageable monthly payment. You can also take the next step and negotiate with creditors directly in order to reduce interest rates, fees, or penalties. However, depending on what type of debt you're carrying this may be risky if you have bad credit. 

The best solution for those who have little hope of improving their current credit score would be bankruptcy as it requires full repayment right away while Chapter 13 allows repayments over time. 

In addition to forgiving debts, non-profit debt counselors will help lower monthly payments through negotiating with creditors; however, they are not always successful due to how much money people owe them. For more information about consolidating your debt and other ways that might work better for you, talk to a local bankruptcy attorney.