Three Paths To Debt Relief
By MortgageCreditProblems.com ColumnistMortgage Credit Problems Columnist
If you've been searching for debt relief, you've probably run across debt consolidation, debt management and debt settlement. Often the terms are used interchangeably, but each is distinct, and it's critical that you know the differences.
Debt Consolidation Defined
Debt consolidation is when you roll your debts into one loan with one monthly payment. The key to successful consolidation is getting a lower interest rate than the high rates you're paying on debts like credit card balances. You can consolidate through a home equity loan or cash out mortgage refinance if you have enough equity. Beware, though, your home serves as collateral, so you could lose your house if you default. Personal loans (not secured by property) carry higher interest rates; check to see what lenders offer. You can also consolidate credit card debt by transferring balances onto one card with a lower rate. Read the fine print, though, because the advertised rate may be introductory. Be aware that frequently switching your balance from one card to another can lower your credit score.
What's a Debt Management Plan?
A debt management plan is simply that--a plan to get out of debt. Design your own or get help from a credit counseling agency. A good plan should not only strategize how to pay off your debt but address poor spending habits and create a realistic budget. If you can't make minimum payments, you or a credit counseling agency can negotiate with creditors for lower interest rates and lower minimum payments. This is different than settling a debt; make sure you're clear in negotiating with creditors so they don't report the debt as "settled."
Not All Problems Resolved with Debt Settlement Plan
With a debt settlement plan you or a company you hire negotiates to settle your debt for less than you owe. This may sound great--your debt gets settled, and you're off the hook for thousands. But there's a catch. Settling requires stopping payment to creditors for months while you save up a lump sum so they're willing to negotiate settlements, which markedly lowers your credit score. Once the debt is paid, the accounts are declared "settled" to credit agencies, which further mars your score. And the forgiven debt becomes taxable income to you. Talk to a reputable financial planner before resorting to debt settlement.
Research and Avoid Scams
Whether you're a renter wanting debt help or homeowner wanting consolidation loan quotes, work only with reputable credit counseling services to help you confront your debt problem. Avoid any offer that sounds too good to be true, and thoroughly investigate companies you're considering hiring to manage your debt.
Sources:
http://www.chicagotribune.com/business/yourmoney/chi-tc-biz-ym-debt-0913sep13,0,7869119.story
http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre38.shtm
http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre19.shtm
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