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"Big business never pays
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a big consumer organization that never pays a nickel in taxes."

Dave Barry
 
Welcome to the Life You Never Expected!


Most of us never plan to get in debt, and we aren’t really prepared to navigate the terrain once we get there. If you’re struggling with debt, you’ve probably heard words like “debt consolidation” and “debt relief” or "debt negotiation" and think they might be talking about the same thing.

They are ways to deal with debt. But debt consolidation is a way different deal than debt relief, which is sometimes known as debt negotiation.

Debt Consolidation

Debt consolidation is a strategy to roll all (or most) of your debts together into one giant debt and then to negotiate the best deal on one single loan. You end up with one payment, instead of many, and if you do it wisely, you’ll be paying less interest so the single payment will be less than the sum of the smaller payments.

Debt consolidation is an approach you can undertake yourself. We highly recommend that you get a certified credit counselor or otherwise expert financial advisor  to help you through this process (and learn some important skills to help you stay out of debt in the future), but you can actually consolidate your debt yourself.

In fact, big money people and businesses consolidate debts all of the time.

If you start to consolidate your debt before it gets too far out of hand, your credit won’t be scorched, your creditors won’t be gypped, and nobody needs to bail you out. You can avoid bankruptcy and other financial disasters and have the peace of mind of knowing that you did the right thing. You’ll be keeping your word and paying off your debts, fair and square. The only thing you’re doing is juggling the way you arrange your debt so that it’s the best deal for you.

The bottom line: debt consolidation does not reduce your debt. Your debt is the same. The only thing you’re doing is arranging for a different way to pay it off, which may result in lower interest … and that means you’ll be paying less, although the debt is the same. (Only the interest changes and it only does that if you can figure out how to consolidate your higher-interest loans into one lower-interest loan.)

You can even consolidate your debt without reducing your interest rate, although obviously, the lower the interest, the better. The purpose of consolidation in that situation is to simplify your situation by having one payment rather than many. And in many cases you can arrange for loan terms that are more favorable to you than the many individual loans.

Debt Relief

Debt relief is something different. It’s advertised frequently on television (although, to be fair, so is debt consolidation although you don't always hear those words on the tube). The concept behind debt relief is that a company will work with your creditors to help get you out of debt. How on earth can they do that?

Different companies have different approaches. If you take this avenue you need to ask lots of questions and don't assume that because one company uses one approach, they all will take the same approach.

Most of the time, the debt relief company will work with your creditors to set up some kind of repayment system. The debt relief company then "takes over" your loans (and handles them for you), while you pay the debt relief company.

The deals they set up can be very complicated. Sometimes, they work with your creditors to restructure your loans (lower minimums, longer time frames). Sometimes, they can arrange to settle your debt for less than you actually owe. In some cases, they just act like another lender, lending you the money to pay off a creditor. And, to make it even more complex, in some cases, they combine methods.

You end up having to pay back only the debt relief company.

The sales pitch they make can sound very tempting. Most of these companies try to present debt relief like a fast, easy, convenient solution. That isn't quite true. Getting out of debt is slow, hard work.

If you work with a debt relief company, make sure you understand what they are doing. Realize that they may charge you high interest rates, sometimes as high as 14%. And be careful, since not every debt relief organization is reputable. You'll definitely want to work with a certified credit counselor before you sign up for this kind of program!

And you shouldn't sign up for a debt relief approach if you haven't looked into debt consolidation first. Debt consolidation is almost always the better answer, if you qualify.

Getting involved with a debt relief company may ruin your credit. While debt consolidation pays back the full amount you owe to the companies you borrowed from, debt relief often involves a settlement with creditors for less than the amount you borrowed. Will companies do that? The answer is yes but for a price.

Let’s say you owe the nice people at Visa $50,000 and you don’t see how you can ever pay that amount back. With debt consolidation, you’d try to get that $50,000 off the Visa card by getting a lower-interest loan to pay Visa off. Then you’d pay off the lower-interest loan which would actually be cheaper to pay off long-term than the higher-interest credit card loan.

The result: Visa gets its money (they're happy), you have restructured the loan in a more advantageous way for you (you're happy), and your credit score stays intact (it may even go up, since you paid off a big debt honorably).

Now let’s take the same scenario with a debt relief company. They’d go the nice people at Visa and say, “We’re authorized to act on behalf of this person who owes you $50,000, and we’re here to say that our client doesn’t have the money and can’t pay you. Our client has no money. In fact, it’s likely our client is going to file for bankruptcy, which means you won’t get anything. However, if you are willing to accept $25,000 and call it square, we’re authorized to settle the debt right now.”

Would a credit card company do that? They might. In fact, deals are made just about every day where a lender goes back to the borrower and threatens bankruptcy in an effort to negotiate a settlement.

Think about what the lender thinks. The lender knows that people can and do go into bankruptcy every day. The lender has probably experienced the pain of seeing big debts go unpaid because of bankruptcy. The lender might very well think to himself that getting a portion of the debt repaid is better than nothing. So that's why lenders often accept settlement terms. They've been burned before!

The problem is that just because a company will take a lower price to settle the debt does not mean that debt won’t come back and haunt you. Coming back to the credit card scenario, the credit card company might very well accept a settlement for less than the amount you owe.

They will also put your name on a black list. You’re not likely to ever be able to get a dollar from them again. Think about it—would you lend money to a person who thought you should be happy taking half of what you lent her?

Second, the credit card people will report this to the credit bureau. As eager as some companies seem to be to extend credit, they aren’t stupid. They extend credit to people with good (or even reasonably OK) credit histories. People who go the debt relief route aren’t desirable.

So your credit score gets dinged. Plus, working with a debt relief company signals to the people who lend money that you're in danger of going bankrupt. Even if you don't ever file bankruptcy, debt relief indicates you got very close.

This is a big price to pay. It means you won’t be able to get credit in the future easily. That means you are going to have to pay cash for your next car, cash for your next house (or if you don’t have a house yet, you’re not likely to qualify for a mortgage even if you earn enough to make the payments), and cash for everything else.

Bad credit can mess things up when you move. Many times, the phone company and electric company will want to check your credit before offering service. If you have a bad credit report, you’re going to have to leave them a hefty deposit to get service.

Now it is true that some companies specialize in offering loans for people with bad credit. Some car dealers even promote the fact that they give money to people with bad credit. Again, don’t assume they’re doing that because they want to help you. It’s a business. And that business is that the loans offered to people with bad credit charge very high interest rates.

Sometimes a debt relief company will actually try to talk you into filing bankruptcy. Bankruptcy is a legal maneuver that basically establishes you as without sufficient funds to pay back your debts. It can help diminish or even eliminate your debts. But it burns your creditors—you are not paying back money you said you’d pay back. Naturally, bankruptcy is bad news for your credit.

Now one last confusing point. Sometimes a company that actually does debt consolidation (taking your full debts and restructuring them) calls itself a debt relief company. So you may find some “debt relief” ads are really about companies that do debt consolidation.

That's why you need to ask these companies what they offer, how they are going to set up your financing plan, and what it could mean for your credit.

This is why you need a certified credit counselor. Make sure they know who you've been talking to and what has been proposed. Don't sign anything until they have had a chance to go over it with you. 

It’s a lot of work, but you want to have to get the best plan for your situation! There are a lot of options out there, and not all of them are great.

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