No Magic Wand: Debt Consolidation, Debt Settlement, & Debt Counselors

​Millions of Americans are struggling to pay their bills in this very difficult economy.  If you are, know that you are not alone.  You may find yourself searching for answers to your problem after seeing ads from lenders, debt counselors and debt settlement companies?  So which alternative is best?  In reality, there is no magic wand that is going to work for everyone in every situation.

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Debt Consolidation
This option typically involves a lender who is willing to make you a new loan to pay off several other loans or debts you have.  This allows you to consolidate the money you owe into a single payment and perhaps extend the repayment period or lower the interest rate. A carefully crafted debt consolidation loan typically allows you to reduce your payments and to avoid late fees and extra charges.  Lenders usually require additional collateral (think car or home) so you may have converted unsecured debt to debt secured by your home or auto and that may pose additional problems if you can’t make your loan payments.  The bottom line is that you still end up owing the same amount of money, you just have longer to pay it off and usually at a lower rate.

Debt Settlement
This option involves negotiating with your creditors to reduce the amount you owe, your interest rate, or both.  In short, the creditor is going to accept less than what you owe them in hopes of getting at least a portion of that debt paid back.  This usually works best if you have a lump sum to offer.  You can work with your creditors on your own but if you don’t have a lump sum you are probably going to have to work with an attorney or with a debt settlement company.  The pros of a debt settlement is that you can satisfy the debt in full for less than what you owe and you are done with it.  The cons are that it will appear on your credit report as a settled debt and you may have to pay taxes on any forgiven debt.  You also need to make sure you are dealing with a reputable company so be sure to contact the Better Business Bureau (www.bbb.org or (703) 276.0100) and check them out before you sign anything.  Keep in mind that a debt settlement does not provide instant relief, can be expensive, and if you are not careful who you work with, may not be a solution at all and could make things worse… much worse.

Debt Counseling
There are reputable organizations like the Consumer Credit Counseling Service (www.cccs.net or 214-638-2227) that work to provide financial literacy education, help in managing budgets and also can help with a debt management plan that is essentially a debt settlement.  Fees with a debt counseling service are usually much lower than a debt settlement company because most are non-profit.  In some cases they may waive their fee if you can’t afford to pay anything.  Debt counselors work with you to get to the root of the problem, which is often inadequate  budgeting skills and insufficient financial information .  To find the nearest nonprofit counseling service, contact the National Foundation for Credit Counseling (www.nfcc.org 1-800-388-2227).

There is no magic wand to get you out of debt.  The real solution is changing your spending habits.  That means reducing your expenses and or increasing your income and getting educated on handling your finances.

Here are a few other tips to help you stay out of trouble:  1) If possible, always pay more than is required.  Paying the minimum amount due on a credit card will keep you in debt and making payments for more than 30 years.  2) Don’t be late – if you are, even one time, you may get hit with a high penalty rate.  3) Use debit instead of credit – debit cards draw the money out of your checking account so they don’t allow you to overspend as easily as a credit card does.  4) Make saving a habit.  Find a way to start saving something every month.  If you can, establish an automatic or direct transfer to savings so you can start to establish a good habit and an emergency fund.  5) Remember, you did not get into debt overnight and you will not get out overnight either – it will take time and hard work!

This information is provided with the understanding that the association is not engaged in rendering specific legal, accounting, or other professional services.  If specific expert assistance is required, the services of a competent, professional person should be sought.

Provided as a public service by the Pennsylvania Association of Community Bankers.