There are a multitude of references to debt consolidation in the media, especially since the downturn in the economy and the corresponding growth in the number of consumers carrying large unsecured debt balances. But there are many misconceptions about debt consolidation, and many Americans have either an inaccurate or incomplete idea of exactly what it is. So it isn’t at all surprising that many poor decisions are being made in financial matters that are related to it. While the term consolidation itself can be defined as combining two or more things into one, debt consolidation can refer to more than one type of financial situation. To get a better grasp of the concept, it’s helpful to take a closer look at the two most common forms of debt consolidation.
The first form of debt consolidation refers to a scenario in which an individual has more than one debt, such as a few credit cards, some loans, or possibly even a mix of the two. He may decide to pay off these individual debts by taking out a single larger loan through a refinancing of a home, by using a home equity line of credit (HELOC), or by taking out a personal loan. The proceeds of the new larger loan are then used to pay off the individual debts. The advantage of having done so are that generally the debts being paid off have higher interest rates, there may be some tax advantages in the new arrangement, or both. The result of this action is that the consumer has consolidated his debts and is now making a single monthly payment toward the combined debt. The included debts can be either secured or unsecured.
The second form of debt consolidation refers to a scenario in which a consumer obtains debt assistance through a company by means of a debt consolidation program. The company, usually a debt management company (also known as a consumer credit counseling agency), will combine the consumer’s individual unsecured debts in such a way that only a single monthly payment is required. This debt consolidation payment is made to the agency, who then pays the individual creditors according to the terms of an agreement. If you notice in this scenario, as opposed to the first, the debts themselves have actually remained separate from one another, and it is only the payment that has been consolidated. Only unsecured debts are eligible.
There are actually two different kinds of companies that offer the consumer this second type of debt consolidation, each offering a different program. One is the aforementioned debt management company, which offers the consumer a consolidated payment toward the full amount owed on the individual debts. A debt settlement company will offer a debt settlement program which also offers the consumer a consolidated payment. But in this case, the payment is made toward the negotiated balances of the amount owed. It should also be noted here that debt consolidation even takes place in a Chapter 13 bankruptcy, as a consolidated payment is made to the trustee for the debts included.
To get a better understanding how each of these credit card debt relief programs may benefit you, it is best to get in contact with a professional debt counselor. They can offer effective debt relief help by analyzing your debt problem and helping you choose the best approach among the wide array of debt solutions available.
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