Is there a big difference between a debt consolidation, debt management, or debt settlement?
Short answer: Yes–Big Differences!
Creating debt in a capitalistic society is super easy to do. However, when it is time to pay back the debt the lender could care less if the debt owed is multiple times higher than the borrower’s income.
As a result, this can leave the borrower dealing with harassing creditor calls because of their inability to make the minimum payments. When this is the case it is pretty difficult to learn how to get out of credit card debt fast.
Since financial education is not part of our Western educational system, the hapless borrower will usually not have any idea how to correct the situation. However, there are debt management options out there that kind of sound like the same thing, but in reality are vastly different.
Let’s take a look at three typical options that may present themselves to the borrower.
Defining Debt Consolidation
Debt Consolidation means that the borrower applies for yet another loan. Hopefully the new loan is made with a lower interest rate that is designed to pay off multiple debts like a home or car or unsecured debts such as credit cards.
Low-interest rate consolidation loans are commonly secured meaning they use the borrower’s assets such as a home or a car as collateral. By putting all bills into this one loan, this can reduce the borrower’s monthly payment and may just give the borrower room to breathe and also pay down their debt.
But, as we have discussed elsewhere on this site, we do not recommend new loans to bail out old loans because this does not typically solve the root of the problem, which is chronic overspending.
Of course, there are several lenders out there eager for your business, even if there you may have a less than ideal credit score. However, when choosing a potential lender, do careful detailed research, and double, no, triple-check the fees and terms of the consolidation loan are reasonable. Lastly, check and double-check that the company you choose has a good reputation.
So What is Debt Settlement
This method involves “getting tough” with the lending institutions by withholding payment for four months or so, then starting a negotiation process before the debt is sent to a collection agency.
When using this method, rest assured that it WILL lower a borrower’s credit score. But if you have some cash available, and choose not to go into bankruptcy, then you may be able to make this method work without help from a company.
However, if you choose to go through a company or agency for this service, it is very likely that you will pay heavy fees for the services. The fees that come along with using a Debt Settlement Company may make it a no-win situation for both the borrower and the claimants. Just make sure to do your due diligence when choosing a company.
Debt Settlement is risky and has several drawbacks due to the varying levels of trustworthiness of the companies out there. For example, they may take your payment and remit only a portion to the bank and keep the rest as a fee. Using this option to relieve debt burden could add more financial problems to your life rather than fix them.
So What is a Debt Management Program?
A Debt Management Program is a third party company who works with you and your lenders to create a structure that makes debt burden more manageable. Out of the three choices, this is traditionally the most secure and dependable way to go.
Certified credit financial counselors can lend their expertise to help you create a financial budget plan that will provide a structure for digging your way out of debt based on your situation. Not only does a good budget plan pay off the creditors but leaves enough cash flow for other family needs.
The professionals behind a good debt management program will work with the lenders to come up with a plan that works to satisfy the borrower’s debt without beating up the banker. How do they do it?
- First, they review the debt on hand then set up a proposal.
- Second, if the borrower agrees, the proposal gets sent to the lenders.
- Third, the creditors take a look at the recommendations and either approves or rejects the agreement.
- Fourth, if everything is approved, there will be a single monthly payment required to be made by the borrower to the credit counseling agency.
- Fifth, after the Debt Management agency receives the initial payment, they will distribute the allotted amount to the creditors.
While under a Debt Management Program the benefit is that you only need to make sure you make one payment. The agency can typically request reduction to super high-interest rates as well, bringing the borrower one step closer to paying off the debt sooner.
When creditors when your back is against the wall and your debts threaten to overwhelm you, if you choose to seek outside help, the first call you make should be to a Debt Management Program. Furthermore, make sure the agency has a good reputation, and they have been around for a long time with lots of solid customer reviews.
By choosing this option, the debt will have a chance be paid back with less stress and even allow you to bring the debt down quickly with extra cash if you are able to earn it. Ultimately, the final decision is entirely up to the borrower to manage their debt burden.