Debt Consolidation Programs - The Confusions and The Helpful Answers

Not to anyone's blame, the phrase "Debt Consolidation Program" is typically misunderstood and can be quite confusing. The three-worded term packs more of a punch than just "putting all your bills together." The reason for this confusion is because there are different aspects and different ways to consolidate your debt. In this article, I will breakdown the differences and leave you with the understanding of what program fits your debt situation best.

Credit Counseling vs. Debt Settlement
The two broad categories of Debt Consolidation Programs are Credit Counseling and Debt Settlement. They both allow you to consolidate your bills into one payment (which is why some people confuse the two), however, that is about the only aspect they have in common.

Let's begin with Credit Counseling (also know as "Debt Management" or "Debt Management Credit Counseling"). This is a program designed by the creditors to help consumers pay back their debt 100% and in a timely fashion. When you enroll with a Certified Credit Counseling company, they will consolidate all your unsecured payments (credit cards, loans with no collateral, etc.) into one monthly payment. So you make one payment to the certified company and they disperse individual payments to your creditors. Because you are enrolled with a certified company, your creditors will give you benefits.

• The number one benefit is lowering your interest rates, allowing more of your money to go to your balances, instead of the finance charges. (Quick example: With a $5000 balance and a $100 monthly payment. Having a 20% rate, approximately $17 goes to your principle. With an 7% rate, approximately $70 goes to your principle)

• Secondly, your single payment might be lower than all your individual payments combined. This varies on which individual creditors you have and how much you owe to that creditor.

• If you are behind, most creditors will allow you to get back to current without paying all the late fees.

• Lastly, because this is a form of consolidation, all your bills are put into one payment.

Who is this program designed for?
- People who have high interest rates and are not seeing their balances go down
- People who want to pay back their debt 100%, but just need some help
- People who want to stay current (or if behind want to get back to current)
- People who want to improve long term credit

With Credit Counseling, if you are current with your payments, you stay current. If you are behind with your payments, you get back to a current status. The advantage of enrolling is you pay your debt back 100% in a faster and more convenient way.

The second category of Debt Consolidation is Debt Settlement (also known as "Debt Negotiation" or "Debt Relief" or "Debt Elimination"). This program is designed for consumers to pay back around 50% of their current debt. Whether you are current or behind with your monthly payments, this program requires the consumer to fall behind on their payments to the creditors. The process is explained in the following steps:

• You make monthly payments to the Certified Debt Settlement company and they would HOLD your money in an escrow account. This money is NOT forwarded to your creditors monthly.

• Month after month your Debt Settlement escrow account grows larger.

• When the balance of this escrow account has reached about 50% of your smallest creditor balance, the Debt Settlement company will negotiate a 50% settlement of that account. (Quick example: With a $5000 balance, once your escrow account has approximately $2500, the Debt Settlement company will negotiate a settlement for that account of approximately $2500)

• The money in your escrow account is paid to that creditor and considered "Account Settled For Less Than Full" or "Account Paid" on your credit report.

• This process is repeated, paying each account one by one, until all of your accounts are settled.

Who is this program designed for?
- People in extreme financial hardship and can only pay very small amount each month.
- People who do not want to pay back their debts in full, but don't want to file bankruptcy
- People who are more than 3-4 months behind

With Debt Settlement, if you are behind with your payments, you remain behind. If you are current with your payments, you must fall behind. When it comes to owing debt, Debt Settlement allows you to pay back only a portion of your debt which is better than paying back zero of it.

As one can see, the differences between these two types of Debt Consolidation are definitely extreme. A full book could be written on the details of these two programs; however, this article is designed to give a general overview and the basic breakdown of the two programs. If you currently have debt (more than $5,000 in unsecured debt), the best way to see what program fits your situation is to speak with a Credit Advisor. Filling out a short request at www.MyDebtControl.com will give you the opportunity to have a Credit Advisor call you and discuss ALL of your debt help options.