Debt Consolidation

Beware of companies who claim to provide debt consolidation services. Not all “debt consolidation” programs are created equal. Before you embark in a debt consolidation program make sure to do your homework and educate yourself. Not only should you read former client reviews, inquire as to the company and read about the program. You should also question whether this is the best alternative for you.

First, one must understand what debt consolidation is intended to achieve. A true debt consolidation program seeks to create a reasonable plan to get out of credit card debt within a specific period of time (usually 4 to 5 years). Debt consolidation does not apply to medical bills, accounts in collection or judgments. Also, a debt consolidation plan hinges on the person’s ability to make monthly payments. Consequently, a person who has a negative cash flow, runs at a deficit, or is unemployed would not be a good candidate for this plan of action.

A true debt consolidation program seeks to reduce the interest rate of each account and create a repayment plan. Typically, the payment is sent to the consolidation agency who distributes the installments to each credit card company. This program is most beneficial for individuals whose main problem is high-interest rate (20% and above) but whose total amount of debt is manageable.

Keep in mind that not all credit card companies work with debt consolidation agencies. Credit card companies are not required by law to work with these agencies. As a result, a debt consolidation program may only include some of your credit cards and not others. In addition, participation in a debt consolidation program will affect your credit score adversely. Credit card companies will report that the account is under a debt relief program and may reduce lines of credit, close your account altogether and revoke privileges.

In recent years, there has been an expansion of companies who purport to provide debt consolidation services when in fact they do not fall true to their promises. These companies have loosened the definition of debt consolidation and degraded it to encompass techniques which do no rehabilitate your credit or provide any sound relief.

The new wave of supposed “debt consolidation” entails in essence defaulting on your credit accounts and seeking to the settle the account for less than what is owed. The “agency” will collect from the customer monthly payments which are held in an “escrow” account until there is enough money to be able to offer a lump sum as full payoff.

As far as the credit card company is concerned, the account is in default. As such, the account may be subject to collection efforts which include the filing of lawsuit. Once the creditor has initiated a lawsuit, there will be court costs and attorney’s fees added onto the total amount due. Since the account is in default, the credit card company will report the account as delinquent on your credit report and this will have a negative effect on your credit score. Consequently, your credit score will decline every month the account remains past due.

Settling an account sounds enticing when you believe that there is a discount. But consider the fact that the amount due is inflated by astronomical interest accumulation and late fees accruing from the point of default to settlement which may be a year or two years down the road. So are you really settling for pennies on the dollar? No, you are not.

If you decide that debt consolidation is the best option for you, be very careful and meticulous on your choice of program and agency. Take your time and do a lot of research before signing up with a specific company. Check the credentials of the company, longevity and reputation.

Do not be misled by the use of phrase “debt consolidation.” Find out the details of the program and request the proposals in writing.

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