Debt Consolidation, Debt Management, and Debt Negotiation

Not one of my clients has wanted to file bankruptcy, and many tried these costly alternatives first but without success.

“Debt Consolidation” is when you replace many loans with one big loan, perhaps at a lower monthly payment and interest rate than the many loans being combined.  It can be very, very costly because the duration of the new loan is usually very long and the interest keeps accruing.  Even worse, if you give a mortgage on your home for this consolidation loan then you’re stuck with it despite a later financial tragedy, such as an unexpected unemployment or illness or injury.  At that point, the only way to get rid of the debt is to surrender your home or, possibly, consult with an attorney about whether the new mortgage has any equity to support it.

“Debt Management” is where you make one monthly payment to a service which charges modest fees and achieves a modest reduction of interest - but not principal.  It can be an affordable way to get out of debt, but beware that not every debt management service is honest.  Sometimes you get misled into  . . .  

“Debt Negotiation,” where reduction of the principal itself is promised and not just a modest reduction of interest.  In my experience, your monthly payments go to the service’s fees first, perhaps $1,500, and then they save your future payments in trust which builds up until the service can negotiate with one creditor at a time for the wonderful reductions.  The problems are three-fold:  The savings can be taxable, a negative entry can be made on your credit report for the compromise, and the remaining creditors are free to continue with harassment and law suits.

Bankruptcy may be your best choice.