Consumers are easily confused about how debt consolidation works because the industry uses interchangeable terms.
Both approaches work very differently and have unique pros and cons. Explore each alternative to decide which is best for your needs before taking the plunge.
A debt settlement program means that you consolidate your payments to multiple creditors in an effort to negotiate relief. If successful, the creditors agree to forgive a portion of what you owe in exchange for immediate partial payment.
In order to qualify for a settlement program, you must owe more than $10,000 in unsecured debt (credit cards, medical debt, personal loans) and have enough income to fund an escrow account with 1/3 of the amount owed.
A debt consolidation loan means that one new lender pays off what you owe to multiple old creditors. You then repay the new lender under different terms (interest rate & the number of payments).
In order to qualify for a consolidation loan, you must have a good credit score and enough income to handle the combined monthly payment to the new lender (after meeting your other living expenses such as housing and transportation).
Articles on this Topic
You need a sizable income to qualify for either option. However, many older adults are judgment proof because collection agencies cannot garnish Social Security retirement benefits, or money held in 401K accounts.
Collection agencies cannot garnish Social Security Disability benefits. However, they could place a lien against personal property. Learn how to game the process.
It may even affect you when trying to buy a house. Mortgage lenders will consider your debt to income ratio, your credit score, and other factors when evaluating your application.
The amount you owe doctors, dentists and hospitals do not help your cause.
However – federal and state agencies enact laws that regulate related activities. People who owe large sums on their credit card, mortgage, or hospital bills will benefit from knowing the consumer protection rights that they have.
You may find it interesting to learn the different ways risk managers may use your answers when deciding whether to approve your request, and then set your initial limit.
Consolidating your accounts into one can dramatically reduce your monthly payments if only you can find a lender willing to approve your request. In addition to working with a broad network of willing lenders, you can improve your chances by reducing your payments, or increasing your income.
Now, the bureau with unique information is most crucial because it could alter a lending decision.