On Debt Consolidation, Counseling, & Settlement

There’s a lot of confusion these days when it comes to dealing with credit card and other types of unsecured, consumer debt. Most people simply don’t understand the difference between debt consolidation, counseling, settlement, and elimination. They’re looking for a magic wand to wave to make their debts vanish into thin air.

Simply understanding the difference between consolidation, counseling, settlement, and elimination will go a long way to helping you figure out how to pay off your debt.

Debt consolidation. This means taking out a new loan to pay off all of your smaller debts, thereby ending up with one new payment that is less than the sum of the previous debts’ monthly payments. This new loan might be from a bank, your 401(k) plan, an individual or it might be a new credit card. Generally, new debt is not the answer to old debt. This method is unlikely to get you out of debt any faster, save you money, or reduce your payments. In fact, it could make things worse. Most people run up the old debt again and find themselves in twice as much trouble.

Debt settlement. This is also known as debt negotiation and debt elimination. Companies advertising this service on television and radio make outrageous promises that, for a fee, they will help rid you of your debt for as little as half the amount you owe. Here’s how this process pans out: You stop paying your bills which trashes your credit scores. Once you are delinquent, your hired “professional” approaches your creditors with an offer to pay far less than you owe. You run the risk of being sued by your creditors or defrauded by the debt settlement outfit. The IRS may also get involved at some point because the difference between what you owed and what you paid becomes taxable income.

Debt counseling. You sign up with a reputable organization that reviews your finances and puts you on a repayment plan to pay off your debt in three to five years. These agencies have agreements with credit card companies that can lower your interest and get you on a payment plan you can handle. This is the recommended plan if you are in a lot of debt with no end in sight, but be careful! For every reputable agency, there are ten new scams out there. You want a counselor that is certified by the National Federation of Credit Counselors. To find a reputable credit counselor, go to NFCC.org.

There is one last solution to consumer debt– Become your own credit counselor. If you are not past due on your monthly payments and you are determined to get out of debt, there is no reason why you cannot become your own financial advisor. If you’ve got the commitment, I can provide the information. It’s all in the book Debt-Proof Living by Mary Hunt.

*Article by Mary Hunt, author of Everyday Cheapskate.