Debt Consolidations Programs and How to Consolidate Your Debt

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The process of consolidating multiple debts through a Debt Management Plan (DMP) begins with a credit counseling session.

During this 45-90 minute session, you will receive actionable advice from a credit counselor regarding options toward reducing your debt and controlling expenses customized to your specific financial situation.

Unsecured debts are eligible for consolidation in a DMP – debts such as:

• mortgages,
• federal student loans,
• home equity lines of credit,
• auto loans,

cannot be included in a DMP.

Once enrolled in a DMP, your credit card accounts will be closed, and you will be unable to obtain new credit. This closure of accounts will have an adverse effect on your credit score.

In fact, though your credit report will state that you are enrolled in a DMP, this does not harm your credit score, although it is the closing of credit card accounts that harms the credit score.

It would be highly counterproductive for you to seek new credit while enrolled in a DMP. Creditors are aware of any applications for additional credit by viewing your credit report. This can result in creditors rescinding interest rate and payment concessions that were put into place through implementation of the DMP.

A good credit counseling agency will provide a realistic budget for the debtor given the specifics of the financial situation involved, and will issue a monthly report illustrating payments made to creditors along with remaining debt balances owed.

The counseling service will also ensure that proper concessions are put into place, maintain communication between the debtor and creditors, and distribute proper payment amounts to individual creditors as structured in the DMP.

Debt consolidation loan (DCL) consolidates debts into one loan at a lower overall interest rate and total monthly payment. This provides the dual benefits of simplifying the payment process and lowering the total amount of debt owed. Types of DCLs include low-interest rate balance transfers on credit cards, personal loans, home equity loans and student loan consolidations.

DCLs are popular for the convenience and debt savings that they provide, though they can result in longer repayment schedules. DCLs are available through banks, credit unions, and online lending sites. If your credit score is at or near 700 – consider consolidating through zero percent interest balance transfer offers on credit cards.

The low introductory rates often expire within 6-18 months and usually carry fees up to 4%, – every dollar paid on them will go toward reducing your debt balance.

Debt consolidation requires organization, patience, time, and money.

1. Begin by itemizing all bills – credit card, medical, utilities, and any other unsecured debt.
2. Next, tally your necessity expenses separately – rent, groceries, transportation, and given your regular monthly income, determine how much you have left over that can be allocated toward a single monthly payment of your unsecured debt.
3. From there, a credit counselor can help you determine whether a debt management program, debt consolidation loan or debt settlement program will be most appropriate for you, given your specific set of financial circumstances.

Debt Consolidation involves taking out one single loan to pay off many unsecured debts, resulting in a single lower monthly payment. If the debtor makes regular timely payments debt consolidation will have a positive impact on the debtor’s credit score. Debt Settlement is different.

Debt Settlement will take place on delinquent accounts which are at or near charge-off status, the point at which creditors realize they may never generate income from them. In debt settlement creditors will often accept less than the balance owed in one lump-sum payment or over time.

Debt settlement usually carries harm to a debtor’s credit score. In a debt settlement scenario, the debtor sends a regular monthly payment into an escrow account that is managed by the debt settlement company.

Meanwhile, these delinquent accounts continue to accrue interest expense and late fees. When the escrow account reaches a targeted level – and this often takes up to three years, the settlement company begins extending settlement offers to creditors who are under no legal obligation to accept any settlement offers. Settlements often do take place resulting in significant savings – but not without tax liabilities and resultant damage to the debtor’s credit profile.

The major difference between debt settlement programs and debt consolidation loans is that there is no loan involved in a debt settlement program.

Both are designed to get the debtor out of debt within five years or less, the credit counseling agency managing the DMP focuses on educating the debtor to alter spending habits and works with creditors to reduce interest rates and monthly payments. The counseling agency then collects a monthly payment from the debtor and makes appropriate disbursements to creditors.