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Debt Consolidation Overview

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Understanding Debt Consolidation

Are you confused by the different definitions for Debt Consolidation?

Debt consolidation is a term used very broadly. It can refer to a debt management plan offered by a credit counseling service. It can mean a cash-out refinance loan or an unsecured loan to pay off debts. Or, it  can be used to describe a debt settlement program.

What is Debt Consolidation?

Both credit  counseling and debt  settlement are options for resolving a debt problem that consolidate your payment. Neither one consolidates a debt. But, in the debt relief industry, both are often referred to as programs that consolidate your debt. Credit counseling an debt settlement programs both have you send a single monthly program payment that is used to take care of your debt, but your debts still are owed to your original creditors. If you are looking for this kind of solution to solve your debt problems, you can apply with one of Bills.com's pre-screened partners.

To be used most precisely, debt consolidation should be reserved for describing options that actually consolidate your debt, not just your payment. For example, say you owe three different credit cards $5,000 each. If you get a $15,000 loan from your bank that pays off all three credit card debts, leaving you with one debt of $15,000, you have truly consolidated your debt. You no longer owe your three original creditors, having consolidated them into one debt you now owe to your bank.

 

What is Debt Consolidation

Debt Consolidation Alternatives

The debt relief industry uses the phrase debt consolidation often, where it is used to describe both payment consolidation options and options that truly consolidate your debt. If you are looking to consolidate debt, because you have a debt problem, it is important to understand exactly how the term debt consolidation is used and how its use affects the pros and cons of each debt solution.

  • Debt Settlement: Debt settlement provides an aggressive debt solution designed for people in a financial hardship who have trouble making their monthly payments or will soon have trouble making them. Debt settlement firms obtain reduced pay-off balances by negotiating with your creditors. Debt settlement harms your credit rating, but it is the cheapest way to get out of debt while avoiding bankruptcy. Debt settlement consolidates your payments, but not your debt.
  • Credit Counseling: Credit counseling services provide two main services. They provide budgetary assistance after reviewing your finances with you. Credit counseling services also can work to establish a Debt Management Plan for you. In a Debt Management Plan, your interest rates are lowered, speeding up the time it takes you to get out of debt. A credit counseling service’s Debt Management Plan consolidates your payment, but not your debt.
  • Cash-out Refinance or HELOC: Both of these are true consolidation alternatives. To qualify for either, you have to have strong credit, qualifying income, and enough equity in your house to borrow against. Many people with debt problems cannot qualify for either of these consolidation alternatives.
  • Bankruptcy: A Chapter 7 bankruptcy can wipe out your debts, if you qualify. A Chapter 13 bankruptcy restructures your debts. A Chapter 13 essentially is a payment consolidation option, as you will make one payment to the bankruptcy trustee, who will distribute your payment to your various creditors, whom you still owe.

Debt Coach

Bills.com introduced Debt Coach, a free tool to help you compare your best options for getting out of debt. Debt Coach offers you a no-cost comparison of the five main strategies for paying off debt, while avoiding bankruptcy. Your solution is custom tailored to your individual situation. Debt Coach analyzes you debt load, credit rating, income, and assets, all while keeping your private information private.

Summary

Take the time to understand the terms used in the debt relief industry, before you select the right option for taking care of your debt. When looking into alternatives for consolidating debt, make sure you understand the difference between debt consolidation and payment consolidation. Either solution may be right for you, but it is important for you to understand how each option works, so you can compare the various pros and cons accurately.

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Comments (18)


Jaleesa T.
Macon, GA  |  January 12, 2012
If my check is being garnished for a federal student loan, can I still attend school while their still garnishing my check?
Bills.com
January 12, 2012
I am not aware of any restriction to your attending school due to having a federal student loan that has fallen into garnishment status. When you have a federal student loans in default, you won't get more federal student loans, but will not be barred from school.
Matthew J.
Lakeville, MN  |  January 10, 2012
Are there consolidation programs where I can keep using one of my credit cards? I need to use a card for travel for work.
Bills.com
January 10, 2012
Most debt settlement programs allow a client to keep one card open for emergency and travel purposes. The same goes for credit counseling debt management programs.
Noris C.
Cranston, RI  |  September 27, 2011
This is valuable information. Thanks!
John J.
Redwood City, CA  |  September 08, 2011
This is a great article.
Bills.com
September 08, 2011
Thanks John!
Angela S.
Carson City, NV  |  July 15, 2011
Hi Bill Thanks for sharing such an informative article with us. I am also a financial writer in a big financial site. I have written many articles on consolidating debt, debt settlement, debt relief, debt management & bankruptcy. And I am aware of many pros & cons of these debt related topics. But you have extended the information to a very deep knowledge. Its really a wonderful article. It is true that paying your credit cards can be a tall hill to climb but in the long run it will certainly save your neck, save you money and most importantly save your credit.
Laura W.
Florence, AZ  |  July 04, 2011
Do you know of any firms that are offering loans to consolidate debt, with unsecured loans, like Beneficial used to do? Thanks Bill.
Bills.com
July 05, 2011
After the credit crunch, a few years ago, many lenders who were offering unsecured personal loans stopped doing so. The ones who still do have tightened credit requirements and lowered the maximum loan amounts they are willing to lend.

Look into peer-to-peer lending. Lending Club is one peer-to-peer lender you can check out.

Citibank offers unsecured loans, but I believe the limit is $7,500 and the interest is quite high (around 22% the last time I checked).

If you are a member of a credit union, see if unsecured loans are available there.
Avatar
Dan A.
Manhattan, NY  |  December 05, 2011
You may as well try other peer-to-peer lending platforms.
Janis I.
Eaton Twp, OH  |  February 22, 2011
I was just turned down for a loan to consolidate some debt. I tried to refinance my home to consolidate debt, but there is not enough equity. I tried to get an unsecured loan, but the interest rates were as high as my credit cards, so that wouldn't help me at all. I am considering the other debt relief options you listed. I am not behind on my payments. If I am making all of my current payments, but am not paying down my debt and feel like I am going to be stuck paying interest (which they hiked to 21% last year, even though I never missed a payment) forever. What do you suggest? Thanks!!!
Bills.com
February 22, 2011
I commend you for looking at your various options for debt relief. As a loan is not an option, I suggest that you look at two specific debt relief options.
  • A Consumer Credit Counseling Service. A credit counseling program will obtain lower interest rates for you, speeding up the time it takes for you to get out of debt. If you are paying high interest now, a credit counseling program would be a very effective way to proceed. A credit counselor will be able to review your debt load, let you know what rates it can obtain from your creditors, and tell you how long it will take you to pay off all the debts you enroll in the program. Your credit score is not affected by the credit counseling program, though during the time you are enrolled in the credit counseling program you may be turned down for new lines of credit, as prospective creditors will be able to see that you are using the services of a third party to help you manage your debt.
  • You could also look at debt settlement as a debt relief option. In a debt settlement program, the firm you hire negotiates reduced dollar payoffs from your various creditors. Debt are often settled for 40-50% of what you owe. Debt settlement will get you out of debt in the shortest time, while avoiding bankruptcy, compared to other debt relief options. Reputable debt settlement firms only take on clients who have a financial hardship. You will have to speak with someone at a debt settlement firm, to see if that debt relief option will work for you. Make sure that you hire only a debt settlement firm that is complying with new Federal Trade Commission rules that went into effect in late 2010. These rules were created to protect the consumer. For instance, anyone now enrolling in a debt settlement program is not required to pay a service fee to the settlement firm until his or her account has been settled. This makes settlement an even more attractive option for the consumer.
Monica M.
Los Angeles, CA  |  February 22, 2011
Can I get a loan to consolidate debt if my credit is not good? I make a decent living, but am trying to dig myself out of about $20,000 credit card debt I ran up during a time when my work hours were cut back severely. I own a home, but don't have equity. My car is paid off, but has a blue book value of about $9,000. I never miss a payment, but the high interest rate on the cards means that most of my payment is going to the interest. Thank you.
Bills.com
February 22, 2011
Prospective lenders will qualify you for a loanthat consolidates your debt the same way they do for most any loan. It is based on your debt-to-income ratio (your income compared to certain debts you service monthly), your credit rating and history, and any collateral or security you have. If your credit is bad, then I think you will have trouble getting a loan. You may be able to borrow against the equity in a car, but car title loans often have high interest, which would negate some or all of the savings. You may be able to take a cash advance on a credit card, but the fees are high and if you don't pay the advance back as agreed, your interest rate can be hiked to the sky. Do you have any retirement accounts that you can borrow against? If you do, that may be a good solution, as long as you repay the loan as agreed, in order to avoid any tax liabilities.

You state that your current income is decent and that you can make all the required payments, but are plagued by the high interest rates on your credit cards. I recommend that you speak with a Consumer Credit Counseling Service. A credit counseling program will obtain lower interest rates for you, speeding up the time it takes for you to get out of debt. Your credit score is not affected by the credit counseling program, though during the time you are enrolled in the credit counseling program you may be turned down for new lines of credit, as prospective creditors will be able to see that you are using the services of a third party to help you manage your debt. You could also look at debt settlement as an option that would get you out of debt in the shortest time, while avoiding bankruptcy. Reputable debt settlement firms only take on clients who have a financial hardship. You will have to speak with someone at a debt settlement firm, to see if that debt relief option will work for you.
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