Debt Relief

 

 

Debt Consolidation

Generally speaking, debt consolidation is a term that covers two types of debt repayment. Of course, the best solution is to pay your unsecured debts as agreed, but if you’ve become severely overextended and keeping up or catching up with your scheduled payments is no longer a realistic option, either a debt management plan (DMP) or settlement plan may help you to reduce your monthly payments and ultimately get out of debt.

A Debt Management Plan is not a consolidation loan. You solicit the help of a third party organization, generally know as a credit counseling agency (CCA), to negotiate with your creditors on your behalf. After the CCA reaches a deal with each of your creditors, all of the payments are combined into one monthly payment that you pay to the CCA acting on your behalf. The agency then takes the payment and pays your creditors based on the agreed upon amounts. The DMP payment that you pay will be less than the current total of your combined monthly payments. Some creditors that participate in the DMP may reduce the interest rate of the unsecured debt significantly, and they may stop adding additional fees to your account. Most creditors will be willing to stop any collection activity that they initiated.

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In order to qualify for a DMP, some obligations rest with you. You may be required to balance your budget and you should expect that all of your revolving debt will be added to the DMP. Afterwards, these unsecured credit accounts will be closed.

The benefits of a Debt Management Plan are a modest to significant reduction in interest rates, the elimination of late fees, a consolidated payment that is less than the sum total of each or your current payments, collection activity is stopped by creditors when they agree to a DMP, your debts are ultimately repaid in full and the impact on your credit score may not be as severe as the impact of a settlement plan.

Also consider that during the course of the program you may not incur more debt, you may not get all of your creditors to participate, and you must consistently make your payment on time.

Settlement Plan

A settlement plan could possibly be your last chance to avoid bankruptcy. It is an attempt to at least pay part of your debts. You start by making an arrangement to send a settlement service a monthly payment. The service, which often times is a law firm, keeps all of your accumulated payments in an account, while negotiating with creditors on your behalf, for a smaller settlement. When there is enough money in the account and a creditor agrees to a settlement, the creditor is then paid. Often, settlement plans are based on a 3 to 5 year payment schedule. However, the faster you accumulate money in your account, the sooner debts with individual creditors can be settled. A settlement plan may provide you with legal backing, in which case a lawyer, for example, may shield you from collection attempts by sending cease and desist letters to creditors and collection agencies.

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Because a settlement service is attempting to reduce the debt you owe, your debt may be reduced significantly. Your total monthly obligations may be reduced by as much as 70%. If you don’t want to declare bankruptcy, this may be a viable option.

Keep in mind that until the debts are settled, they will appear as bad debts on your credit reports. This may affect applications for credit and services as well as job opportunities during the course of the settlement plan. If the settlement service does not provide a service that will impede collection attempts, you may find that collection attempts will continue and possibly increase.