What To Know About Debt Consolidation
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What To Know About Debt Consolidation

According to statistics provided by the Federal Reserve, the average American household features a total credit card debt of nearly $16,000 with an average student loan debt of almost $34,000. While the economy is standing strong, and even improving according to certain forecasts, the amount of consumer debt is quickly approaching the $12 trillion mark. Because of the rising flood of debts, many consumers seek refuge from this epidemic by taking control of their financial standings and consolidating their debt.

What is Debt Consolidation?

Before moving forward, it's essential to understand what debt consolidation actually is. In a nutshell, debt consolidation is the act of reworking debt repayment to eliminate as much principle with each payment as possible. While there are many different forms of debt consolidation, the end result is always the same. Although you may encounter a wide variety of debt consolidation companies and techniques, the two most common methods of consolidation are settlement plans and debt management plans.

Settlement Plan

Unlike bankruptcy, which completely eliminates consumer debt at the price of your credit worthiness, debt settlement plans are laid out in a way to reduce overall debt balances while still requiring a certain portion to be paid. This form of debt consolidation is ideal for those who are unable to make their minimum monthly payments, but wish to protect their credit report as much as possible.

While the specifics referring to this type of debt consolidation plan vary, the majority of consolidation companies go about this process in the following manner:

I. A settlement amount is agreed upon. The borrower and lender come together and agree upon a final debt amount. While this amount can dramatically vary, it is always less than the original owed amount.

II. Settlement deposit amount is created. Instead of making payments directly to the creditor, monthly installment payments are placed into a settlement account. This third-party account holds the funds until the entire settlement amount is reached.

III. Settlement is paid in full. Once the settlement account has reached its desired amount, the money is transferred into the creditors account and your account is then marked "paid in full."

Debt Management Plans

Often referred to as DMPs, debt management plans are specialized repayment plans designed to lower overall monthly payments and interest rates with the guarantee of the entire debt being paid off. According to Your650Score, often times this form of debt consolidation eliminates added balances caused from late payment fees, overdraft fees and extreme interest rates. While there is still interest being paid on the account, when a DMP is enacted the consumer will likely save hundreds, if not thousands, of dollars in interest and fee payments. Obviously, this form of consolidation is only viable for those capable of handling the monthly payments set forth by the creditor or collection agency.


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