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Can debt consolidation help you pay off collection accounts?

William Shakespeare penned the phrase “a rose by any other name smells as sweet” in Romeo and Juliet. The reference implies that names do not always reflect who we are.

Likewise, the finance industry refers to the phrase “debt consolidation” to reference at least three different methods for paying off obligations.

This article lays out the pros and cons of the three ways you can consolidate collection accounts. Decide for yourself, which approach works best to retire what you owe the agency.

  1. Reach a settlement over time to pay less than what you owe
  2. Set up a payment plan that could reduce late fees and interest charges
  3. Take out a personal loan to pay off the debt in collections 

Debt Consolidation Programs to Pay Off Collections

Two types of debt consolidation programs can help you pay off collection accounts without borrowing money from a third party company. You may find that these approaches are more realistic and save money over time.

It is much easier to qualify for programs that do not require a pristine credit history – which you do not have after a collection account appears on your consumer report. Also, you are not paying origination fees or interest charges.

However, there is one caveat. You can negotiate a settlement or payment plan yourself. You do not have to pay for the expertise of a third party company. Decide for yourself if it is better to go it alone or with the help of a professional.

Debt Settlement

Do you qualify for debt relief? You can hire a third party company to manage a debt consolidation program designed to reach a negotiated settlement with the collection agency. With a settlement, the agency agrees to accept less than what you owe on your obligations.

The consumers who benefit most from consolidating debt in this manner meet three criteria.

  1. Owe more than $10,000 in unsecured obligations
    1. credit cards
    2. personal loans
    3. medical bills
  2. Already behind on payments with unpaid bills on consumer reports
  3. Gainfully employed with a steady income to fund an escrow account

The industry refers to this process as debt consolidation because the first step entails combining all of your payments into an escrow account. Escrow is a designated holding place that an agent manages for specific purposes. In this case, the goal is to offer immediate payment to the collection agency to settle the obligation for less than what you owe.

Keep in mind; the settlement process requires you to become delinquent on all of your other borrowing relationships deliberately for two reasons.

  1. Shows financial hardship and motivates the agency to accept less than what you owe
  2. Diverting money from existing obligations speeds funding of the escrow account

Also, both the delinquencies and debt settlement trade line will appear on your consumer report and hurt your credit score. However, most people with unpaid bills in collections already have a poor rating. Therefore, you have much to gain and little to lose.

Debt Management

Debt management is another type of consolidation program that can help you pay off collection accounts. A trained counselor will help you establish a budget, and you will begin by sending a combined payment to one company, rather than multiple places.

The management company may negotiate a payment plan with the collection agency. The agency is more likely to reduce late fees, interest rates, and other charges when a responsible government-approved third party agrees to oversee the payment plan arrangement.

A debt management company-arranged payment plan could reduce the amount of money you must pay over time. Also, it can restore your consumer report to display a paid collection trade line, which is better for your credit score.

Consolidation Loans to Pay Off Collections

Debt consolidation loans could provide you the funding needed to pay off your collection accounts in full. Borrowing money from another company may keep the agencies from harassing you, and give your credit score a quick boost.

However, consolidation loans often increase the amount you owe via origination fees and interest charges, and it may be tough to qualify. Working with online lenders and showing steady income can overcome the existing black marks on your consumer report.

Personal Loans

Request a personal loan to pay off collection debt here. Online lenders are often a better place to turn for this type of funding than your local brick and mortar bank or credit union. Online finance companies specialize in debt consolidation and use innovative underwriting tools to make a lending decision.

  • Use alternative credit reports to find positive behaviors for people with collection agency trade lines appearing on their traditional file with Equifax, Experian, or TransUnion
  • Consider the projected debt-to-income ratio after they combine the soon-to-be-retired obligations into a single loan with lower monthly payments

Be prepared with critical documents when completing your online request form. Making a good first impression is the best way to optimize your approval chances.

  • Demonstrate sufficient income to make payments
    • Time employed
    • Employer name
    • Employer phone number
  • Verify your identity
    • Driver’s license number
    • Social security number
  • Input your bank routing number and account number
    • 3rd level of identity verification
    • Consent to auto withdrawals

Collections on Report

Getting a lender to approve a request for a consolidation loan to pay off collection debt can be very difficult. Collection agencies often report the adverse history to the credit bureaus as a way to motivate people to retire the obligation quickly.

Adverse history appearing on your credit report hurts your credit score. Lenders shy away from approving people with poor credit scores because of the high likelihood of future default. Therefore, you need to have a strategy to overcome the existing blemishes on your record.

Here are three strategies to improve your approval chances when collection trade lines hurt your credit score.

  1. Submit your request to a vast network of online lenders who bid on the opportunity to present offers suited to your borrowing profile. In this case, the volume is your best friend.
  2. Narrow your search to lenders that use alternative sources of financial data such as rental records, utility payments, and other data that may show positive experience.
  3. Demonstrate a stable work history and sufficient income to handle the projected monthly payments with ease. Provide documentation to verify earnings.

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