Debt Consolidation Programs

From LoveToKnow Creditcards

Debt consolidation programs can be a tool for keeping you out of bankruptcy court, but there can be drawbacks that you should be aware of.

Learn tips for credit card debt elimination

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What are Debt Consolidation Programs?

Debt consolidation programs are designed to help you organize and repay your outstanding debts when you find yourself in financial difficulties. Essentially, all of your various sources of unsecured debt can be bundled together into one monthly payment.

Though some people believe debt consolidation to be synonymous with consumer credit counseling, it is really only one option that a credit counselor may recommend to someone who has a serious and perhaps unmanageable amount of debt. It doesn't magically eliminate your debts, but it can provide you with a workable program to repay what you owe.

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How Do These Programs Work?

Debt consolidation programs begin on the premise that your current debts can be reduced through negotiations with the various companies involved. These renegotiated accounts are then combined, allowing you to make a one lump sum payment into your debt consolidation program each month, which the counselor handling your account then redistributes to each company involved, according to the newly negotiated rates.

A good debt consolidation program can be quite a relief by ending all harassing collection calls and providing an active program to guide you in repaying your debts. However, you should be aware that not all of these programs operate with the same level of professionalism and integrity.

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Be Aware of Common Misrepresentations

Credit counseling can be very helpful, but debt consolidation is a bit of a slippery slope if you find yourself in the hands of a less than ethical company. Here are a few things you should keep in mind when considering entering one of these programs.

Some debt consolidation programs may lead you to believe that they will be able to negotiate a better deal for you with your creditors than any other program. This is not exactly true. Many credit lenders already have reduction programs in place for delinquent debtors, so most people will receive the same reductions regardless of the consolidation program they use, with very few exceptions. In fact, there is nothing stopping you from negotiating directly with your lenders.

Basically, once your credit counselor makes contact with a company, you will be shuffled into the same program as everyone else, so beware of anyone who tells you they got you a "real deal". It doesn't happen that often.

If a debt consolidation program is able to get a significantly lower payment plan for you, say 25-50 percent below the average going debt reduction rates, there may be some cause for concern. Some consolidation programs may take your monthly payments, but withhold them from your creditors in an effort to force them to settle your debts at a slashed rate.

This process is actually known as debt settlement, which can be a highly effective means of getting you out of debt quickly, but it can come with severe repercussions on your credit report, as more late fees will accrue as payments are missed. If you have not agreed to this practice in writing with your consolidation program, follow up with your creditors on your own to make sure they are receiving the agreed proportion of your monthly consolidation payments.

Watch out for certain types of clauses in your consolidation agreement. Some consolidation companies add a clause stating that they get to keep any remaining money in your consolidation account if you miss even one payment. If you sign such an agreement, you may wind up throwing your money away instead of solving your debt troubles, so read everything carefully before you sign on the dotted line.

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Alternatives to Debt Consolidation Programs

Before entering a debt consolidation program, there are a few other options you may want to explore that could have a potentially less negative effect on your credit rating.

Home equity loans or credit lines may provide homeowners with enough quick money to pay off other creditors, but there is potential risk involved. Your home is your collateral, and if you fail to repay your loan, you will likely lose your house. This option is best suited for someone who has the willpower to avoid running up additional debts once the old debts have been paid off.
Take on secondary employment. It may be an obvious solution, but taking on a second job, at least temporarily, may provide you with enough extra income to cover payments on your outstanding debts with an eye toward discharging them completely. This option is actually good for your credit history as well.
Borrowing from a whole life insurance policy is another option for accessing quick cash to pay off debts. This option is less risky than a home equity credit line, because you don't actually have to repay yourself the money you take out. However, if you don't put the money back into the policy, you'll have that much less in reserves in the event of your death, which is definitely something to be considered.
Borrowing from a 401K is yet another option, but as with home equity credit, the money must be repaid, and can be subject to taxes and/or penalties prior to repayment. This should never be a first choice option.

Whether you choose debt consolidation programs or another method to pay off your debts, one thing is certain. Unless you are able to break the cycle of incurring more debt, you'll never be able to establish a secure financial picture. Keep the number of open credit card accounts limited to one or two at the most, avoid frivolous or unnecessary purchases, and develop and stick to a budget based on your actual monthly income.

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External Links

The National Foundation for Consumer Credit Counseling is a Web site that will help you find reputable credit counselors and debt consolidation programs in your area.

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