While many don't realize it, the American consumer has numerous options available when choosing the best method to become debt free. Debt consolidation, debt settlement, & debt management are three of the most common available options for consumers that can no longer afford to meet their financial obligations on a monthly basis. The pros and cons of each will be discussed below in order to provide consumers with the information required to make an educated decision as to which option best suits their specific needs.
Debt Settlement: Debt negotiation, or debt settlement as it's often referred, is most often performed by a debt settlement company or attorney. There are two methods in which debt settlement can be approached. The individual must already have the funds available for the debt settlement company or attorney to use in its negotiation, or the individual can make monthly payments into an account that is reserved for the debt settlement company or attorney to use in its negotiation.
There are two major benefits to debt settlement/debt negotiation. The first benefit is that you can stop making monthly payments to the creditors you plan on settling with, in turn creating more discretionary funds available for your use on a monthly basis. The second benefit is that the majority of consumers should expect to save between 50-60% of the total amount owed to their creditors. The debt negotiation company or attorney will be able to start negotiating immediately, should you have the funds readily available. But should you not have the funds readily available, the debt negotiation company or attorney will begin negotiating with your creditors as you begin making regularly scheduled deposits into your settlement account.
Once a settlement is agreed upon with your creditors, the debt negotiation company or attorney will release a one-time payment in order to settle the debt. While the savings created by debt settlement/debt negotiation may come across to be quite attractive at first glance, it is imperative to understand that it will most positively have a serious derogatory impact on your credit report. Each and every month that you choose not to pay your creditors and make deposits into your settlement account will show up on your credit report as a late payment. Eventually, that collection account will be charged off, sent to an attorney or third party collection agency, & then be reported on your credit report as a collection account. You will most definitely have a very limited amount of time to settle the account once it has been turned over to an attorney or third party collection agency. While there are numerous issues to be considered at this point, it would be quite reasonable to expect the attorney or third party collection agency to proceed with legal action, file a warrant-in-debt, and attempt to obtain a judgment against you. Should the attorney or third party collection agency obtain a judgment against you, it will also be reported negatively on your credit report. It is crucial that you understand late payments, collections, & judgments will severely damage your credit report for many years to come.
Debt Management: Credit counseling companies, often referred to as debt management companies, work to save the individual time and money by allowing you to combine the majority of of your unsecured monthly debt and make one, lower monthly payment to their debt management company. It is very important for consumers to understand that credit counseling companies do not provide consolidation loans. Rather, the credit counseling company takes your payment and divides the money among your creditors, with whom they have often negotiated lower interest rates and payments with.
While taking advantage of the services offered by a reputable debt management company can save you a lot of time & money, it is also imperative to understand the potential pitfalls and problems associated with using the services of a credit counseling company. One of the most serious issues you should be aware of is that using the services of a credit counseling company can potentially have a derogatory impact on your credit report. In fact, the majority of mortgage underwriting guidelines see credit counseling companies to be the same as a chapter 13 bankruptcy. Further, it is also imperative to understand that your responsibility for making payments on time has not been waived by choosing to use the services of a credit counseling company. Should the credit counseling company fail to make your payments on time, whether due to a simple mistake or negligence, it will most definitely be reported and be reported in a negative light on your credit report.
Debt Consolidation: Debt Consolidation can be a fantastic option to become debt free but should not be done hastily and must be done with planning & forethought. There are numerous ways to consolidate debt. The most common debt consolidation methods are: obtaining a Home Equity Line of Credit (HELOC), obtaining a signature/personal loan, or transferring the balances of higher interest rate credit cards to one with a high available credit line & lower interest rate.
Obtaining a Home Equity Line of Credit (HELOC) can be a creative method to consolidate debt. While the associated payment & interest rate on most HELOCs can be relatively low, many consumers do not understand just how much money they will be paying over the life of the Home Equity Line of Credit (HELOC). That said, HELOCs also have a much larger benefit over other debt consolidation methods. One of the most beneficial benefits to using a HELOC to consolidate your debt is that the interest you pay on the HELOC can be tax deductible in specific situations.
A signature/personal loan is another good option when choosing to consolidate your debt. While a signature/personal loan may be a fine option, a high credit score will almost certainly be required. The interest rate will usually be much higher than that of a Home Equity Line of Credit but more than reasonable when you consider that it is uncollateralized. Rest assured, the payment will be much higher than that of HELOC. And, you cannot write off the interest on your taxes.
Transferring the balances on your high interest rate credit cards can be a good option but not always the best option for everyone. Obviously, you will need another credit card with an available credit limit high enough to consolidate your accumulated credit car debt. It is also very important that you choose a credit card with a fairly low interest rate. Many credit cards have balance transfer offers that can be as low as zero percent over a given period of time. While these offers can be quite attractive, it is important to realize that they are typically for a very short period of time. These offers can also be quite dangerous because once the card is maxed out, it will surely be difficult to transfer the balance elsewhere. Many consumers find themselves trapped in this situation & unable to pay off the entire balance before the introductory interest rate increases to the fully indexed rate. For this reason, many consumers end up defaulting on a debt consolidation method of this type.
As you can see, there are many options available when choosing the best method to become debt free. Each of these methods have ups and downs that should be taken into consideration when trying to decide which method best suits your specific needs. As you can imagine, it is crucial that you consider each carefully and develop a good plan prior to making your decision. And, do not be hesitant to seek help should you need the assistance of a professional financial planner.
Author Resource:-
Alexander Wright spends the majority of his time writing articles in the areas of credit repair & credit restoration. Alexander writes for Credit Restoration Bureau (CRB), professional credit repair experts located in the Hampton Roads area of Virginia.
Debt Settlement Vs Debt Consolidation VS Credit Counseling
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