You need to get your act spot-on when servicing huge debts. There are many options and advice that may somewhat muddy the waters and leave you in two minds in going about the issue. Debt consolidation programs can lend some clarity to the picture, provided you understand that each program has its own set of pros and cons. You need to make the right decision by taking into account your debt situation.
What are debt consolidation programs?
Debt consolidation programs are a set of measures that are directed to prevent your debts from increasing further, reduce them and eventually wipe them out. Here is an insight into the most popular debt consolidation programs/mechanisms.
Credit counseling is offered by professional debt counselors associated with credit counseling agencies. This is generally the first line of defense against debts and aims more at orienting your finances in a way that your debts are paid off without causing too much stress.
Besides for-profit agencies, there are a number of non-profit credit counseling agencies that offer credit counseling. Counselors use their professional skill and competence to come up with a payment plan for you to follow. Your entire fiscal scenario is taken into account while preparing the plan and regular sessions are undertaken to monitor your situation and progress as per the plan. The payments plan will attribute different amounts to creditors, depending on the amounts owed, the interest rates and the type of debt.
A credit counselor may move in a debt management plan (DMP) if it is obvious that measures need to be stepped up in order to pay the debts and get debt-free. Under a DMP, the counseling agency talks to each of your creditors and strikes negotiations with them on vital parameters of your debts – interest rate, late fees, annual fees etc.
Once negotiations turn final, a payment plan is drawn up by the credit counseling agency, which proposes payments to each creditor in specific amounts per month. You pay a consolidated sum to the counseling agency, which then breaks it down into smaller payments and pays off each of your creditors. Remember that DMP is only applicable to unsecured debts.
Another popular way to cut off debts is debt consolidation. In debt consolidation, you take a single loan and make use of this (consolidated) loan to clear outstanding debts. Since these loans are low-interest loans, you save money on interest amounts, and you also do away with the hassle of making individual payment against each of your debt. You only make a consolidated payment per month against a single, consolidated loan. The flip side is that consolidation loans are mostly secured loans and require a collateral, thereby converting unsecured debts into secured ones. Debt consolidation is limited to unsecured debts only.
Credit card debt consolidation programs essentially work on the same principle of debt consolidation, but in a slightly different manner. Credit card companies offer consolidation through balance transfers. You can transfer balance on individual cards on to a single, low-interest card and save yourself from the high rates of interest on each credit card balance. Again, the hassle of paying on multiple credit cards is done away as you tend to a single card on to which balances had been transferred.
However, it is also possible to consolidate credit card debt through home equity loans, personal loans and just any other loan that give you enough cash up-front to pay off your credit card debts.
Consider debt settlement when you anticipate meek chances of meeting your debts. Professional attorneys and agencies need to be consulted before going in for debt settlement.
Under debt settlement, professional agencies take it upon them to negotiate debts with your creditors. At the end of negotiations, the agency strikes a deal with your creditor where in you are required to pay a sum which is significantly less than the principal debt, and the debts are deemed settled between you and the creditor.
So you pay much less than the original and get the debt bundle off your back. Debt settlement, for all its benefits, also comes with a drawback. The settlement process hurts your credit report and is not seen in bright light by most creditors. So getting loans and credits in the future not only becomes a tough nut but will also be a cut above in price.
Consider bankruptcy when nothing works for you and it is simply improbable to pay the debts. If you are granted bankruptcy, all your debts stand cleared; but it causes major dents in your credit report and it shows for a period of up to 10 years.