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Understand the different types of debt relief

May 5, 2008

There are several ways to pay down debt, but many consumers don’t understand the differences between the various methods, or they sign up with companies that don’t fulfill their promises of quick debt reduction.

There are some important things to look for when choosing a method to pay off or manage your debt.

The first thing to understand is that there is no quick fix to get rid of debt. There is also no way to legally remove from your credit report debt that you incurred. Be wary of any company that promises to quickly eliminate your debt or remove valid, outstanding debts from your credit report.

There are many terms associated with debt reduction that people tend to use interchangeably, but they are all very different.

A Debt Management Plan, or DMP, is a debt repayment program managed by a credit counseling agency. The credit counseling agency will negotiate lower interest rates and/or monthly payments with your creditors. In turn, you will submit one payment to the credit counseling agency, and the agency will disperse the payment to your creditors. It is important to note that you cannot use credit cards or take out personal loans while you are on a DMP.

A debt consolidation loan is a single loan you take out to pay off your creditors. With this option, you are simply moving all of your debt from several accounts to one account. This is not the same as a debt management plan.

Debt settlement is a process where you, or an attorney working on your behalf, negotiate a payoff amount with your creditors to eliminate your debt. Commonly the entire payment must be made at one time. Often regular monthly payments are not made while the client is saving up their payoff amount, which could result in negative items on your credit report and a lower credit score. This option could work for you if you have a lump sum of money to pay off the settlement amount right away.

Which debt repayment option is best for you is dependant upon your individual situation. It is important that you research and understand all of the options available to you and that you understand the benefits and pitfalls to all of the options.

Steer clear of credit counseling agencies that try to force you into a debt management plan, don’t spend the appropriate amount of time reviewing your financial situation or that pay their counselors a commission. A reputable agency should be willing to send you free information about their agency, its services and all costs and fees.

You can pay down your debt, but you have to make an educated decision about which method will work best for you.

Written by admin · Filed Under Debt, Credit Counseling 

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