Understanding Debt Consolidation

Another requirement is attending money management classes, kind of like being forced to go to debtors' rehab.While bankruptcy does have its place, it is definitely the "last resort."Debt settlement and debt negotiation mean roughly the same thing: you or somebody representing you sits down and talks to your creditors to work out a solution.The principle is that you work out (negotiate) a way to end (settle) your debt. You may be able to get the interest rate reduced or the terms of payment changed (such as getting a couple of months off or extending the terms of the loan). Sometimes you negotiate to try to get the balance reduced. As an example, assume you owe $10,000. You would negotiate with your creditor to try to get him to http://www.iamsport.org/pg/bookmarks/livertune5/read/36953184/understanding-debt-consolidation accept less, say $5,000, and mark the debt paid in full.Why would anyone do that? The main reason a creditor will negotiate a debt is that they suspect you are flirting with bankruptcy and they are fearful that if you go bankrupt, they won't get anything. From their viewpoint, $5,000 may be better than nothing.Debt settlement and negotiation plans will almost assuredly make it all but impossible to get future loans at reasonable interest (if at all).A debt management plan (DMP) is a formal plan where you hand your problem off to a company which then negotiates your debt. You make one monthly payment to the DMP and they handle your problem.While there are legitimate DMP programs out there, these are very treacherous waters. Do your homework and check with the Better Business Bureau as well as a certified credit counselor (nfcc.org) and maybe your bank or credit union. There are programs out there that are outright frauds and a few that are not dishonest but not exactly advantageous to the customer.The last approach is something called debt consolidation. Ironically, many debt settlement, debt management plans, and debt negotiation companies will call their programs "debt consolidation." That is not inaccurate, but it's a bit misleading.Debt consolidation simply means lumping all your debts together. In one way, that is what all debt plans do at first, whether it's bankruptcy, a DMP, or some other program.But pure debt consolidation involves lumping your debts together and then taking out one big loan to pay them off.Why would anyone do that?If you have a lot of high-interest loans, you may be able to take out lower-interest loans to pay them off. For instance, if you owe $10,000 at 22% on a credit card and you can borrow $10,000 at 10% from your bank, you would be smart to borrow $10,000 at 10% and pay off the credit card. You still owe $10,000, but you owe it at less than half the interest rate. If you keep making the same payments, you'll pay the debt off much sooner.If you own a house and can refinance it or get a home equity loan or second mortgage, you can use that to consolidate your debt. Let's say all of your debts together came to $100,000 and you owed them at varying interest rates from 22% down to 10%. If you own a house and take out a second mortgage (or use another refinancing option), you can borrow $100,000 and pay off all of your debt. You can structure this second mortgage as a 30-year loan and probably get it at 7% or even lower.