Problem debt requires professional solutions. Which is right for you?

Millions of people in this country owe more money than they should. It has just become way too easy to spend money on a credit card and worry about paying it later. Later often comes sooner than we expect, and if you cannot pay on time, you encounter late fees, penalties and added interest. Over time, this can add up to thousands of additional dollars. You can end up on a debt treadmill with seemingly no way out.

There are professional solutions to these problems, but for many people, the solutions are often as confusing as the problems themselves. Many people with financial troubles encounter terms like “debt consolidation”, “debt management” and “debt settlement”, but have no idea what they mean. Are they the same? Will any one of them help solve your problems? We’ll have a look.

Debt consolidation is the process of taking several loans, usually at high rates of interest, and replacing them with a single loan for an amount equal to the sum of the others. If the interest rate for the consolidation loan is lower than for the other loans, the borrower can save money by making one single payment each month that is lower than the sum of the payments he or she was making previously.

Debt consolidation loans work well if your credit isn’t completely shot; you still need to be able to borrow in order to make it work. Home equity loans work well for this, as many debtors have homes with equity in them. As a bonus, the interest on these loans is deductible from Federal income tax. On the downside, the borrower is putting his or her home at risk as collateral for the loan. In case of default, the lender may foreclose.

Debt management involves hiring a professional firm to work with your creditors to help you pay them off. The agency may be able to persuade your creditors to lower your interest rates and/or waive some fees. You will make regular payments to the agency, who will, in turn, make payments to your creditors for you. Agencies charge fees for this, and not all of them are reputable. Be sure to do some research before you sign up with a debt management company.

Debt settlement is the most drastic step. In this case, you or an intermediary acting on your behalf negotiates a settlement with your creditors for less than the full amount owed. Your creditors may or may not agree to do this. If they do, it is because they have no reason to think you will ever pay in full. If you go this route, be aware that you will pay income taxes on any forgiven debt. In addition, the creditor will report to the credit bureaus that the debt was settled for less than the full amount. This can reduce your ability to get credit in the future.

Some solutions work better for some people than others. If you are in doubt as to which works best for you, see a credit counseling agency.

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