How Does Debt Consolidation Work?

When you are faced with obligations to several creditors and can no longer manage to keep up with your payments, debt consolidation is one of your options. While it may not be the best solution for everyone, it certainly can help you manage and reduce your debt faster and more consistently than if you were to do it on your own.

So how does debt consolidation work?

Debt consolidation is done by a debt consolidation counselor. They will want to have a list of all your debts and creditors information. You will also need to provide all of your income information. The counselor will then contact all of your creditors and negotiate to lower interest and finances charges, stop fees and penalties, and ward off collection calls from creditors. Most creditors will be agreeable to working with the consolidation program. Since so many consumers are in debt, the creditors would rather be assured they will be getting their money rather than risk you filing bankruptcy.

The Next Step
Once the creditors agree, the debt consolidation counselor will set up a payment plan based on your financial capabilities. Keep in mind that not all creditors will be willing to participate in the program and you will still need to continue making timely payments on those accounts to avoid legal action. All the creditors that do agree will then have the outstanding balances combined into a lump sum with the debt consolidation company. The counselor will make a payment plan for you based on your income and you will then make one payment each month to the consolidation company. The counselor will then divide up that single payment and distribute an amount agreed upon by the creditors to the creditors.

After several months of consistent payments, your creditors will likely stop calling and continue to collect the payments towards your debts. Since your counselor may have negotiated lower finance charges, you may see the light at the end of the debt tunnel in 3-5 years, depending on your amount of debt. The debt consolidation company will likely charge a fee and it will vary depending on the company.

As you continue to make payments, the consolidation company will send you periodic statements which you should review to be certain your balances are decreasing. Checking in with your creditors as well might not be a bad idea for your own peace of mind if you aren’t getting regular statements from them. When your finally get to the end of your payment obligation, your debts will be officially paid in full, as required – unlike a debt settlement where a lower payoff balance is negotiated.

Seeking Counsel
When you are considering debt consolidation, remember that exploring several companies before committing to any one is the best option. Not all counselors will provide the same services or the same rates. You will want to check into procedures and fees to be sure the debt counseling company is the right one for you. A good counseling service will also be proactive about really counseling you how to manage your money and provide personal financial resources for you in the future.

Once you have satisfied your payment obligations, start working right away on your credit report and credit score to ensure you are getting all of your finances back on the right track. Work hard at keeping your score high and your debt low to avoid falling into a debt trap later on.