Despite the fact that more and more Americans need debt solutions, there is still a lot of confusion about what debt consolidation is and is not (or, as we say here in Texas, what it ain’t).
Debt consolidation is legal, ethical, and in the case of big business, pretty common practice. While there may be people selling scams associated with debt consolidation, as debt solutions go, it’s on the up and up. Debt consolidation involves re-packaging your debts in a way that gives you more favorable terms. Debt consolidation does not involve writing off debts or getting rid of debt. It can actually improve your credit score. Although you can do it through a professional organization or with a debt counselor, you can also do it on your own.
Debt settlement and debt negotiation are plans that involve reaching an agreement with your creditors that can reduce your debt. These typically involve outside organizations and, yes, there are scams associated with them. But there are also legit programs. When you settle your debt, you agree to pay a portion of what you owe in return for the debt being “settled.” You don’t get hounded by bill collectors. It will impact your credit in a negative way.
Debt management typically refers to a program that you sign up for through a third party (often a company) where they “manage” your debt while you pay them. This may appeal to people who just want to hand off their credit problems to a third party, but this is a very dangerous field–in fact, more scams are probably in debt management than any other debt solution arena. But there are still companies who do this on the up-and-up. The idea is that they negotiate or settle your debts, manage your payments, and make life simple for you. It will hurt your credit.
Bankruptcy belongs on this list, although to me it is not really a debt solution as much as a “last resort” when your finances are totally on life support. If you have to file for bankruptcy, there is no shame in it. It’s legal (it’s guaranteed in the Constitution, no less) and it’s not unethical. The only thing is that it’s extreme. Bankruptcy protects you from creditors (in fact, if you get bill collectors hounding you when you’re in bankruptcy protection, you can call them cops on them) and it not only settles some of your debts, it writes other debts off. Literally makes them go away! The bad news with bankruptcy protection is that it ruins your credit for seven years and it is terribly intrusive. Bankruptcy involves having a lawyer and going to court. The judge then has a lot of say in terms of what you have to do and can order you to sell all sorts of things as part of the terms of your bankruptcy.
Which solution is best? That depends on your financial problems, your personality, what you want to get out of the debt solution, how much you owe, the rules in your state (bankruptcy laws, in particular, vary by state), and even what you qualify for. By far the best solution is debt consolidation if you’re disciplined, if your debts are suitable for it, and if you can qualify.
Debt Consolidation Inspiration 