You see a Facebook ad about consolidation or you just received a letter in the mailbox how you “may” be able to consolidate your debt at an interest rate below 9.99% and put hundreds back in your pocket each month. Maybe it looks something like this?
You think to yourself, “I know my credit is bad, but it doesn’t hurt to at least check if I qualify” because you know you pay back your debts and the reason your credit score is lower is because of your credit utilization.
You apply.
Unfortunately, you aren’t approved for the debt consolidation loan, BUT, there’s good news, you qualified for their debt consolidation program.
Is this the same thing? NO. It’s far different. The purpose of this article is to explain:
- How debt consolidation programs work.
- The debt consolidation process
- The pros and cons of debt consolidation programs.
- Your debt consolidation alternatives
If you don’t want to read the entire article, my recommendation is to take a debt settlement calculator before signing off on any program. The results provide you a holistic, unbiased comparison based on YOUR situation. It gives you the estimated costs, and pros and cons based on your financials, and zip code. You may also want to consider the debt relief company fees.
How debt consolidation programs work
A Debt consolidation program is also known as debt settlement or debt relief. Although there are legitimate companies in the space, some companies pitch themselves as lenders only to never qualify you for the loan and hope that you get into the debt consolidation program without asking too many questions.
This is wrong, and probably one of the CFPB states that debt consolidation programs can be risky.
But, you are unable to continue to afford your debt, you want to avoid bankruptcy, and you need a solution. Debt consolidation programs can be that solution, but you need to be aware of how the companies work. And, make sure you find a legitimate debt consolidation program company.
So, what is a debt consolidation program?
A debt consolidation program is the process where you “consolidate” all of your debts into one draft amount to a bank account. The debt consolidation program then negotiates your debts for lesser then owed due to a financial hardship.
Let’s say you have $10,000 in unsecured debt. The debt consolidation program would try to negotiate that to $5,000.
Debt consolidation programs negotiate for lower debt amounts (ex: $10,000 to $5,000). Debt management programs (also known as credit counseling) negotiate for lower interest rates (ex: 25% to 11%).
What is the process of the debt consolidation program?
When you enroll in the debt consolidation program, the company will work as an intermediary between you and the creditors to negotiate settlements.
Here’s the process:
- The debt consolidation company will create an enrollee owned bank account for your consolidated payment each month. The bank account is in yours, but you give them access to settle your accounts, with your permission.
- You send one consolidated payment to the escrow bank account instead of paying your credit cards and loans each month.
- The company will begin to negotiate with the creditors based on the funds you have and how past due are your accounts.
- Once an offer is made, the debt consolidation company will request your approval and use the funds from your escrow bank account to pay off the creditors while taking their fee.
- You will go through this process over and over again until all your debts have been resolved.
Once your plan has been completed, you will graduate from the debt consolidation program. So, is it worth it? Let’s talk about the pros and cons of debt consolidation.
Pros of Debt Consolidation Programs
You can save real money
As long as you get into a program that has acceptable fees, you can save money with a debt consolidation program. Let’s say you have $10,000 in debt, and that debt is settled for $5,000. The debt consolidation program takes 15% or $1,500, and then you can save around $3,000 – $3,500. T\
This is a simplistic example, but you can estimate savings between 20 – 30%.
You get payment flexibility
When paying credit cards or while enrolled Chapter 13, you can’t generally take a break for Christmas to make a payment.
You can do this with a debt consolidation program if you are not in a current settlement.
You can get out of debt much faster than paying minimums
Paying minimums can take between 15-30 years to payoff your debt. In a debt consolidation program, you will close out your accounts and often get on structured settlements.
You can avoid bankruptcy
While bankruptcy is a legal option, some people want to avoid it for personal reasons. You can avoid bankruptcy when you are successful in a debt consolidation progra,.
Cons of Debt Consolidation Programs
You need to hear the cons. I do not like that some companies will not address the cons. Debt consolidation may still be best for you, but you need to know them and what to expect.
Your credit score and report will likely be damaged
Debt consolidation companies only negotiate when your accounts are behind. This will hurt your credit score.
When the accounts are negotiated, your credit report will have the “Account Paid: Settled for Less”, which is better than “Charged Off”, but not as good as “Paid in Full”.
Potential Taxes on Forgiven Debt
Many people do not have to pay taxes on forgiven debt because they are tax insolvent per the IRS. That said, you should research whether you are or not before enrolling.
Creditors may sue you
Some creditors sue for unpaid debt. Some creditors do not sue. The free debt consolidation comparison calculator below takes whether creditors may sue, so it’s imperative to know whether your creditors may sue.
The debt consolidation program can still settle these accounts, but it’s important to be prepared.
Your Debt Consolidation Program Alternatives
While a debt consolidation program may be the best option, you may wish to PASS on a debt consolidation program that is pitching itself as a debt consolidation loan.
This feels sketchy, at best. You need to know the pros and cons and alternatives before making that decision. Often these companies may not even mention that your accounts have to go PAST DUE before they start negotiating.
So, what are the alternatives? The alternatives are debt management, debt payoff planning, Chapter 7 and Chapter 13 bankruptcy.
What would I do if I were in your situation? I would take debt settlement calculator, which provides you a holistic, unbiased comparison based on YOUR situation. It gives you the estimated costs, and pros and cons based on your financials, and zip code.
