For-profit companies that help debt-ridden consumers deal with personal financial problems go by several different names. They may call themselves debt relief, debt management, debt settlement, debt negotiation or debt consolidation companies.
Depending on your particular situation and what services they offer, they can help you decide the most appropriate strategy to take care of your overdue obligations.
Some companies maintain in-house debt negotiators and counselors. Others are consultation and referral services that connect consumers to their network of other companies, credit counselors and debt attorneys.
Why a Debt Consolidation Company?
A good debt company will provide you with clear answers, and have a reputation for integrity and success.
Most debt relief companies will only help you settle your unsecured debts, including credit card bills, unsecured personal loans, payday loans, medical and hospital bills, department store credit cards, accounts in collections and certain utility bills.
Eventually, they can help deflect harassing calls from collection agencies and work with you to make your bill paying more manageable.
Under most circumstances, they will not help you with student loans, secured personal loans, mortgage and car loans, and tax payments. Some companies will require that you have a minimum amount of unsecured debt – usually $10,000.
Companies that offer debt settlement programs will attempt to negotiate with your creditors to lower the principal balances that you owe in order to settle your accounts for less than the actual amounts owed.
Choosing a Debt Consolidation Company
When choosing a debt relief company, you should do a considerable amount of research to find one that offers the type of debt solution that makes the most sense for you and for your circumstances.
Search for one that gives you honest and upfront information about its fees, the pros and cons of its solution options, its experience and whether it conforms to the Federal Trade Commission (FTC) guidelines. Any accredited debt consolidation company will adhere to FTC regulations.
Inquire about the company’s trade organization memberships. If possible, seek out references from former or current clients.
How Debt Consolidation Companies Work
Companies that offer debt consolidation services will negotiate with your creditors to lower your interest rates and reduce any penalties and/or late fees that have accrued. You will have to pay off the entire principal amounts, but instead of paying each individual creditor every month, you will pay the company one monthly payment.
The company will disperse the money to your creditors on your behalf.
A debt consolidation company may enroll you in a Debt Management Plan (DMP), which will consider your monthly income and expenses to find a comfortable amount that you can afford to pay each month. DMPs generally last between three to five years and don’t have a negative effect on your credit score.
Some companies offer debt consolidation loans or will advise you to seek out a home equity loan or home equity line of credit (HELOC) or other secured loan. There are companies that offer unsecured debt consolidation loans, but the interest rates on these loans are generally high. Further, some consumers are not eligible for a debt consolidation loan because of their poor credit, high debt balances or other reasons that make them a bad risk to a potential lender.
For a debt consolidation loan to make sense, the monthly payment, interest, and/or payback terms must be less than what you are currently paying. If the loan is secured, you must be certain that you can follow through on your new loan agreement, or you risk losing your home or other assets.
Trading unsecured debts for a secured one is a risky option, so be very careful before choosing this alternative.
Rules to Remember
The first rule of choosing a debt consolidation or settlement company is to make sure that you don’t pay excessive fees until you are certain that your creditors will agree to negotiation.
The second rule is: Always build up your negotiating funds in a separate, FDIC-insured trust account.
Beware of a consolidation or settlement company that asks you to pay it directly or one that charges you excessive upfront fees before it settles any of your debts. Make sure that you have the ability to approve any agreements negotiated with your creditors.
If you do find yourself in debt trouble and need to contract a debt consolidation or settlement company, do so with a clear understanding of what is involved. Make sure that you can commit to, and follow through with, any plan that you decide will help you get debt-free.