Debt Consolidation

You may be able to lower your cost of credit by consolidating your debt through a second mortgage or a home equity line of credit.

  • Remember: these loans require you to put up your home as collateral. If you can’t make payments – or if your payments are late – you could lose your home.
  • Costs of consolidation loans can add up.
  • Interest on the loans may be high:
  • May have to pay points, with one point equal to one percent of the amount you borrow.
  • May provide certain tax advantages that aren’t available with other kinds of credit. Discuss with a tax professional first.

Debt Negotiation Programs

  • Debt negotiation (or debt settlement) differs greatly from credit counseling and DMPs. It can be very risky, and have a long term negative impact on your credit report, and in turn your ability to get credit.
  • How it works: Must be credit card debt and you must be behind on your payment.
  • Most debt negotiation agencies require you to set a certain amount of money aside each month to build a fund. They will almost always take their fees directly from that account and stop payment on your credit cards, which means you could be sued for collection.
  • Debt negotiation agencies claim to stay in touch with your creditors and monitor your account. When they think your account has sufficient funds set aside, they will try to make a settlement.
  • They usually charge you a fee at the start to set up and take a percentage of the settlement at the time of negotiation.
  • Negotiate one credit card debt at a time.
  • Analyzing risks. 

  • REMEMBER: Just because a debt negotiation company describes itself as a “nonprofit” organization, there’s no guarantee that the services they offer are legitimate. Most debt negotiation companies charge consumers substantial fees for their services, including a fee to establish the account with the debt negotiator, a monthly service fee, and a final fee of a percentage of the money you’ve supposedly saved.
  • Agencies may claim that they can arrange for your unsecured debt – typically credit card debt – to be paid off for anywhere from 10-50 percent of the balance owed. 

  • BE WARY: There is no guarantee a creditor will accept partial payment of a legitimate debt.
  • Agencies cannot promise their services will have little or no negative impact on your ability to get credit in the future, or that any negative information can be removed from your credit report when you complete their debt negotiation program. 

  • TRUTH: While creditors have no obligation to negotiate the amount a consumer owes, they have a legal obligation to provide accurate information to the credit reporting agencies, including your failure to make monthly payments. That can result in a negative entry on your credit report. And in certain situations, creditors may have the right to sue you to recover the money you owe. In some instances, when creditors win a lawsuit, they have the right to garnish your wages or put a lien on your home. Finally, the IRS may consider any amount of forgiven debt to be taxable income.
  • If the information on your credit report is accurate and timely, it can’t be changed or removed. Negative information can remain on your credit report for seven years and a bankruptcy will be noted for ten years. If you discover mistakes or outdated items on your report, you can fix them yourself by notifying the bureaus.
  • Even if one debt is settled, your credit report will still show that you are in default on your other debts.
  • Companies might try to get you to stop making payments to your creditors, and have you, instead, send payments to them so they can pay your creditors on your behalf. Sometimes they don’t actually send your payments to your creditors causing you further trouble.

  • BE CAUTIOUS: If you stop making payments on a credit card, late fees and interest usually are added to the debt each month (also default shows up in credit report). If you exceed your credit limit, additional fees and charges also can be added.
  • Tip-offs to Rip-offs – Steer clear of debt negotiation companies that:
  • Guarantee they can remove your unsecured debt.
  • Promise that unsecured debts can be paid off with pennies on the dollar.
  • Require substantial monthly service fees.
  • Demand payment of a percentage of savings.
  • Require you to make monthly payments to them, rather than with your creditors.
  • Claim that creditors never sue consumers for non-payment of unsecured debt.
  • Promise that using their system will have no negative impact on your credit report.
  • Claim they can remove accurate negative information from your credit report.

On to the next section!