When Debt Consolidation Part III: What to Expect

Once you have decided that it is time to seek help for your debt situation, and have determined which kind of agency is best for you, you should know what to expect from the agency you choose.

Good debt counselors walk you through the debt consolidation process. They help you to determine your best debt solution, and can provide a timeline of when you can expect to become debt-free. Experienced debt counselors also can use the ordeals of previous clients to relate to your situation. The best counselors will relieve your stress and worry by keeping you informed, but they will not make unrealistic promises… “Pennies on the dollar...no interest loans...forgiveness of all unsecured debt...” Remember, if it sounds too good to be true, it probably is.

There are four basic outcomes to debt management or credit counseling. Know your options, and do not rush into any alternative without being certain of your decision:

• Debt consolidation loans
• Credit counseling, including Debt Management Plans
• Debt Negotiation
• Bankruptcy (Chapters 7 or 13). Under new laws, credit counseling is required before filing is permitted.

Now let’s take a closer look at the first three options. Bankruptcy is the most complex debt plan and will be discussed in a different article

Debt Negotiation

Some debt help companies will contact your creditors and negotiate a payment plan that often is comprised of lowered fees, penalties, payments, and even interest rates. Unfortunately, however, these debt negotiation agreements usually end up on your credit report, and the result is almost indistinguishable from having filed Chapter 13 (reorganization bankruptcy for individuals).

There are advantages to debt negotiation, especially for someone who is otherwise intent on filing bankruptcy. Just be careful. Avoid guarantees of any kind, and avoid companies that charge fees for simple enrollment, or that ask for a percentage of negotiated ‘savings’. Just because someone is non-profit does not mean they are inexpensive. Beware of any company that encourages you to “stop paying creditors now”.

Debt Consolidation Loans

In part I of this article series, we summarized the money-saving aspects of consolidation, when it works, and when it is not necessary. If credit card debt hangs over your head, debt consolidation remains one of the smartest ways to rid yourself of debt and save money.

Credit Counseling

Credit counseling is not the same as a debt management plan (DMP). Some companies will provide you with a DMP, collect their service fees, and give you nothing else for your money. Along with a DMP, you also should receive credit counseling from the company you enlist to help with your debt problems. You are entitled to expert advice about what you could have done, should have done, and potentially can do in the future to better your financial situation. You should receive customized information for your unique situation.

More are more people increasingly are taking advantage of a DMP. A DMP should not have a drastic effect on your credit, and it is a powerful negotiating strategy. It will include a bottom-line, monthly payment. Do not sign anything before you know this amount, and that you can afford to pay it.

A DMP requires you set aside a budgeted amount of money every month for a credit counseling agency. Be absolutely certain that the agency is legitimate. If an agency claims that ‘bad credit’ can be erased by using the payment strategy of a DMP, for example, keep on walking. It just won’t happen.

Remember to be an active partner in the process. For example, if your counselor says that your creditor requires a payment before accepting a DMP, call the creditor to verify what you have been told. If your counselor does not encourage your involvement, then find another company!

Conclusions

People often fail to begin debt management because they do not know what to expect and cannot foresee the end of the process. With the help of a competent, trustworthy professional, you can expect a useful plan that culminates in your becoming debt-free. If you stay the course, your financial situation will improve one step at a time.

Part I
Part II