Debt Consolidation
debt negotiation
and
debt management
a look at the differences with a clarification
Debt consolidation;
Many times when a company claims to be a debt consolidation company they are in fact either a debt settlement company or a debt management company.
Generally debt negotiation companies are debt settlement companies but some debt management companies can also use this term.
This use of different terms for two very different services can be quite confusing!!
In your use or search to use one of these companies they should right away make known which they really are.
In debt settlement the company will be negotiating a lower balance on your unsecured credit balances.
In debt management the company will be negotiating a lower percentage rate on the balance left on that account.
These companies appear to have many similarities but there are major differences.
Some of these companies may be trying to be deceptive but many times it's mostly a matter of marketing themselves.
If you own a company, you are there to make money. Putting yourself as a debt consolidator especially on the internet is a huge way to market yourself .
You can't blame a company for trying to get as much exposure as they can for themselves.
What one needs to watch for, is, when that debt consolidation company tries to make you believe they are your only option.
A reputable company will take a full survey of your financial situation, the goals you have in mind, and take time to educate you about the service they provide. They will make sure your goals are truly beneficial for you and the service they provide is what is best for you.
Debt management;
This service is usually performed by a credit counselor.
They take into account your credit history to see if you qualify for their program.
They do not negotiate for lower balances but are usually able to get the creditor to re-age your account which is the act of putting it back to the status it was before your troubles.
Usually they are able to take a past due account and give that a current status.
So they can eliminate the fees you accumulated. What they will negotiate is the interest rate.
Many times they are able to reduce that significantly especially if you have been late with payments and your interest has skyrocketed because of it.
They will also help you manage those accounts in a way that results in a timely reduction of debt.
An area that blurs the lines and makes it confusing to tell the two types of debt consolidation companies apart, is that they both advertise that you can make one monthly payment simplifying the process and your life.
This may be true but how each handles that payment is quite different.
In debt management,
the company after analyzing your situation and negotiating with your creditors for better rates develops a repayment plan.
This plan must be agreeable to you before utilizing it. The payment you make then will be used to make payments to your creditors in your behalf. So in this plan you should know exactly where all the money you sent is going.
Your creditors are being paid on time and to a plan already negotiated with them.
In debt consolidation that is really debt settlement,
The monthly payment is going into a trust account.
Your creditors are not being paid.
A hit to your credit score is going to happen.
You are withholding payment to put your creditor into the position of needing to negotiate with you or the attorney or certified individual that handles your account.
That monthly payment is building to an amount that your account manager can use to negotiate with your creditor.
So if your credit line has a balance of 8000.00 and your account has 3500.00 your manager may say to the creditor I have 3500.00 will you accept that. It may or may not work.
And they may be able to negotiate a re-aging of your account but nothing is guaranteed.
If there is success a substantial amount can be saved in repaying the debt.
The use of either types of these kind of debt consolidation plans depends on your financial situation.
If you have regular income and your situation with debt has just got a little out of control, then debt consolidation in the form of debt management is usually the best course.
Debt consolidation that is really debt settlement or debt negotiation is best when there has been an income loss with no solution in sight. Usually those who choose this course are trying to avoid bankruptcy and many times have drained some resources such as cash value to an insurance policy to reduce debt levels.
Here is a link for more details about debt settlement
Then there are debt consolidation loans.
These loans are many times secured against collateral and it's usually a home.
The rate is fixed and can be lower than what one would probably receive on the unsecured debt that they paying off. Of course the down side is if you default on the loan you can lose your home.
These have been the basic differences in companies that call themselves a debt consolidation company.
Next is a list highlighting the significant aspects of dealing with a debt management company.
In debt consolidation that is actually debt management
A main consideration is that the plan is performed by a certified credit counselor.
There are many organizations that are non-profit that provide this service. By law being non-profit they are required to provide free counseling and education.
So the fees are very modest and even if you can't afford them what they will provide for free is the credit counseling. The education is important because not only do you want to get out of that debt but need the assistance and skills to remain debt free once you obtain that goal.
Another service that should be provided by reputable debt management companies is budget management counseling and savings planning.
This should all start with a comprehensive interview of your current financial situation and possibly how you got there.
In some instances you may not even be eligible for a management program and counseling may be all that is needed to get out of your situation.
Upon attaining all your information they should be putting a plan in place for your approval.You should be able to see the results of their negotiation on your behalf.
There should be a formal agreement in writing with all fees associated with the plan in the agreement. If you are dealing with a non-profit agency and you feel you cannot afford the service they may qualify you for the service at no cost.
Most debt management plans take approx. 3-5 years to finish. It depends on the amount of debt and how much you are able to pay.
Generally you are asked to either close the accounts that are in the plan or freeze use on them.
Acquiring new credit is strongly discouraged and may be looked at by creditors as your not taking the situation serious enough and may put the results of negotiation at risk.
In many ways the debt management plan echos the chapter 13 bankruptcy but without the mark of bankruptcy.
The Federal Trade commission has been warning consumers of companies in debt consolidation that have called themselves non-profit when they actually are not.
The FTC is taking action on some of these companies and suing them for false representation.
So choose your debt management agency with care.
Check them out with the BBB and consumer action agency in your area. You can also try putting the name of the company you wish to be using in the search box at the FTC website.
Before signing on for the service check with your creditors and see if they have in fact been contacted by the company and have agreed to the terms set out in your agreement.
It is also suggested that once the plan is in force to check your statements and make sure the plan is being performed as agreed and all payments are made on time and the right amount.
Late payments made once in a debt management plan can have a disastrous effect. The progress you made in reducing payment amounts,fee waiving and re-aging your account could be lost and creditors unwilling or even unable to work with you again in that manner.
As you can see it is important to check on the work of your agency.
As you continue your way with your debt management plan your credit report will note that you are in a debt management plan (dmp) but this usually does not have a negative impact on your score.
Actually most see this as a responsible act taken to manage your credit wisely. In some cases it may even improve your score if the negotiations on late fees result in them being waived opening the way for the account to be re-aged or reported as current..
Whether or not a debt management plan is right for you is something only you and your counselor can assess.
You may come across articles that say you can do all they do yourself for free and in some instances this may be true.
Consider this though. If you call a credit card company and ask for a reduction they may give it to you or you may have to present a good reason for the reduction.
Who has the stronger case for the reduction yourself who has a need for the reduction or the credit counselor of a debt consolidation company who as a third party with an unbiased view and can attest to proof that there is a need for the reduction and the case that bankruptcy can be avoided.
Along with the fact that the card company may already have a relationship with this professional who will most likely have the ability because of that established relationship achieve the waive of fees.
Also to consider is your management of finances especially in the occurrence of any new stress added on to your life.
If you are drowning in debt that is stressful enough, if you add in other difficulties such as a job loss or reduction, divorce or illness especially of the auto-immune variety. These make management of debt difficult and the need of a qualified professional necessary.
Your mental capacity will be drained (I know this from experience).
It is very helpful and desirable in these instances to have a plan developed and put in place for you and the ease of one payment instead of many.
Debt consolidation in the form of debt management can be a very valuable resource for many.
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