Debt consolidation involves combining a variety of different bills related to unsecured debt into one simple monthly payment. If you are facing a significant number of bills related to credit cards, medical bills and personal loans, debt consolidation could represent the right solution for you.
When you consolidate several bills into one payment, you decrease the risk of submitting late payments that cause additional fees or making mistakes related to sending incorrect amounts to creditors.
You can also benefit by reducing your overall monthly payment on your debt while reducing interest rates and interest expense.Finally, debt consolidation can help protect your credit score while getting you out of debt in less time. Sound like a good idea?
Let’s take a closer look.
Debt Management Plans
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:
- 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.
More About Debt Management Plans
A debt management plan is a structured agreement entered among multiple parties – the debtor, creditors, and credit counseling service.
A properly structured DMP that is overseen by a skilled credit counselor helps debtors get out of debt while assisting creditors in collecting money that is owed to them.
As a debtor, it is your responsibility to submit timely monthly payments in full. This, above all, will insure the success of your DMP. Make sure not to be late on any payments to your counseling service, as that will affect disbursements to your creditors and impact your credit score.
A missed payment can result in creditors suspending consolidation. To prevent this, any missed payments will need to be made up to get your DMP back in good standing. Be certain to check that all monthly statements that you receive from creditors align with information on the monthly DMP report, and report any discrepancies to your credit counseling service.
Creditors are willing to make consolidations through debt management plans because it helps them collect on accounts that could otherwise become worthless to them. You can anticipate lower interest rates and monthly payments, and sometimes a “re-aging” of accounts that can put an end to late fees.
Any collection phone calls if they don’t diminish in frequency shortly following enrollment will cease once creditors have received three monthly payments through a DMP.
Even better, once your debts have been paid off through a DMP, creditors will often mark the debt as paid in full. This will help restore your credit score back to health.
Credit Counseling Agency
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 Loans
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.
- Begin by itemizing all bills – credit card, medical, utilities, and any other unsecured debt.
- 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.
- 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 and Debt Settlement
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.
Debt Consolidation Loan Example
In a good debt consolidation loan scenario, the debtor borrows sufficient funds to pay off all unsecured debts (credit cards, medical bills, some student loans) and streamline many monthly payments into one smaller monthly payment at an overall lower interest rate against the debt consolidation loan. It is also important for the debtor to adjust away from the poor spending habits that led to accumulating debt in the first place.
Debt consolidation loans are not bad on credit score – on the contrary, they can be good for a credit score when a debtor makes regular, timely payments against the DCL. Any late or missed payments will quickly cause harm to a credit profile.
Debt consolidation loans are not taxable, whereas any debt savings over $600 that is achieved through a debt settlement plan is taxed as ordinary income.
Consider the Options, Know the Risks and Capture the Opportunity
If are burdened by high levels of unsecured debt, debt consolidation could be a viable solution. To succeed, you must be focused and motivated to become debt-free. The simplified payment structure with lower monthly payments and reduced interest expense can really help your cash flow.
Most creditors view debt consolidation as a favorable method to pay off financial obligations. Though you may see some negative impact to your credit profile initially from the closure of several credit card accounts within a debt management program, when you consistently make timely payments.
This can eventually result in your accounts being reported to the three major credit bureaus (Experian, Equifax, and TransUnion) as paid in full. This will enhance both your credit score and overall credit profile, making you more appealing to creditors again.
Best of all, you will finally be out from under the debt burden that has been robbing you of peace of mind, and you will be free to enjoy the virtues of a debt-free lifestyle and freedom.
Bankruptcy was not an option I wanted to use
Bankruptcy was not an option I really wanted to use. I wanted to find an alternative to this process that would enable me to get rid of my debt for good without having a bad mark on my credit history. That is what United Settlement...
United Settlement was there for me when I could not be there for myself
United Settlement was there for me when I could not be there for myself. I was not sure how to move forward when I had a massive amount of debt. I could not figure out how to get out from under the seemingly endless amount of debt...
I had no idea that I could reorganize my utility builds or residential leases
I had no idea that I could reorganize my utility builds or residential leases. But United Settlement helped me see that I could. They were very friendly in telling us about what our options were as a family and how we could potentially...
Everybody knows how ridiculous student loans are
Everybody knows how ridiculous student loans are, and that was not lost on me when I chose to take out hundreds of thousands in student loan debt. Relieving a measure of pressure for my student loans was my primary focus. I chose...
Restructuring business debt is not an easy thing to do
Restructuring business debt is not an easy thing to do. But United Settlement was great at helping me figure that out. Understanding financial situations and goals was what I really wanted, and they did exactly that. They helped...
I had no clue that I was paying more than 100% APR on my small business loan
When I reached out to United Settlement, I had no clue that I was paying more than 100% APR on my small business loan. I could not believe it! But I was paying that much which meant I could not ever get out from underneath that...
Handling my business debt was not something I looked forward to
Handling my business debt was not something I looked forward to. But United Settlement was so patient with my questions and helped me figure out how to handle my debt as a small business owner. I qualified for a small business...
I didn't even know what type of interest rates there were and how those affected my debt overall
When I contacted United Settlement, I didn't even know what type of interest rates there were and how those affected my debt overall. So, when I went to go buy a new house, I was shocked to find out that I had terrible credit....
Debt settlement is what we signed up for when we were interested in using United Settlement
Debt settlement is what we signed up for when we were interested in using United Settlement. We needed a company to negotiate on our behalf to help us reduce the total amount of debt we owed, and we were looking for some hands-on...
I had no idea that I could lower my credit card interest rates. But when I contacted United Settlement, they explained to me that I could negotiate my interest rates down lower along with my payoff balance. Having this type of...
If you have ever had an unmanageable amount of credit card debt
If you have ever had an unmanageable amount of credit card debt, you know how ridiculous it is to try to pay it off. In my situation, I did not want to wait until the last moment to get this debt under control. So, I contacted...
Medical debt is damaging to your long-term credit
Medical debt is damaging to your long-term credit. That is what we were dedicated to managing our debt as soon as we got our medical bills from an unexpected surgery that our insurance did not cover. I turned to United Settlement...
Finding a good alternative to business debt relief is far from easy
Finding a good alternative to business debt relief is far from easy. As a company, we have spent years trying to find a good solution to our business’ debt, because if we can get it out of the way we can thrive. That’s what...
I had no clue that a debt consulting company could provide guidance
I had no clue that a debt consulting company could provide guidance and what type of loans you should take out. I was thrilled by the communication I had with United Settlement. They did not hesitate to provide me with the best...
Buying a new vehicle should not stress you out to the point that you cry every night to go to sleep
Buying a new vehicle should not stress you out to the point that you cry every night to go to sleep. But that was the point I was at before I contacted United Settlement. These guys were professionals at helping me figure out what...
I knew I needed to file bankruptcy before I even contacted the team at United Settlement
I knew I needed to file bankruptcy before I even contacted the team at United Settlement. My biggest issue was how to file and also what type of bankruptcy I should file. A lot of people do not know that there are three types of...
Who would have thought that auto loan debt can take such a toll on a family
Who would have thought that auto loan debt can take such a toll on a family? Well, we discovered how that could happen when our family bought two new vehicles. We thought we could afford the payments, but we did not take into consideration...
Why go bankrupt when you do not have to?
Why go bankrupt when you do not have to? That was my thinking when I decided to hire United Settlement. I wanted them to help me get out from underneath my credit card and auto loan debt. They were very thorough in explaining to...
Who knew that you could get credit card debt relief
Who knew that you could get credit card debt relief just by reaching out to a credit card consolidation company? I did not. But I had a friend recommend United Settlement to help me get through my debt situation. They recommended...
We had a revolving credit card debt that just wouldn’t quit
We had a revolving credit card debt that just wouldn’t quit. This in turn made it difficult to try to buy a house. Our credit card debt literally held us back from moving forward in life. But our goal was to reduce the debt so...