Debt Consolidation Programs - Buyer Beware

If you are looking for a debt consolidation program you will be surprised to learn that there are no government programs for this purpose except for people with multiple student loans. If anyone tells you otherwise beware it may be a scam. There are numerous debt consolidation programs run by private companies and non-profits but they are not backed by the government.

With the growing number of people in financial trouble these days many scam artists have entered the debt consolidation or debt relief business looking for desperate people to take advantage of. This is a business where the old saying "buyer beware" is really important. People who are desperate for help with their finances are ripe for programs designed to look good on paper but in reality have very high hidden fees and in the long run hurt the debtor rather than help.

There are two basic types of programs, debt management and debt settlement, and each has its own advantages and its disadvantages. Let's look at debt management programs first.

With debt management plans you sign an agreement with a debt management service agency to manage your unsecured debt. The agency works out a plan for your individual situation and gets your creditors to agree with the plan. Usually the creditors will agree because they would rather collect part of the debt than see you go bankrupt and not pay at all. You make one payment to the agency each month and it makes payments to your creditors. Often the creditors will agree to lower the interest rate, remove late fees and even lower the principle if the payments are made on time.

Evaluate these programs carefully and watch out for excessive hidden fees, because once in the program the agency will likely have you until the debts are paid which could take several years and excessive hidden fees will add up to a substantial amount. This is a common occurrence in this industry; people often do not even know how much they are paying for the program. On the other hand pick a good program and you will save money, get your debts paid off more quickly and avoid bankruptcy.

With debt settlement plans you sign an agreement allowing the agency to negotiate a settlement with your unsecured creditors. The agency tries to get the creditor to accept a lesser amount to settle the debt. Sometimes they can get the debt reduced as much as a 60% to 70%. The big disadvantage with these type programs is that usually you must have the money on hand to accept the settlement offer and the agency wants to split the savings with you as their fee. If you don't have the money the agency will not negotiate until you do. The agency may set up an escrow account that you can pay into each month until you have enough to settle a debt and pay the fee. Unless you can access enough money to execute the settlements quickly chances are this type of plan will not work for you because while you are accumulating cash in you account your debts will continue to accrue interest and unless you are able to maintain at least the minimum payments simultaneously you will also accrue late fees.

Often this type of plan will have you stop paying on your debts and just pay into the escrow account. The idea is that your creditors will be more anxious to settle when you finally have enough money accumulated in your account. In reality doing this will intensify collection efforts by the creditors, cause your balances to increase and cause your credit rating to decline. But the biggest risk with this type of plan is that you will be sued by you creditors and have your wages garnished before you are able to accumulate the cash to settle your debts and then end up declaring bankruptcy anyway.

The best thing to do when you are in debt and need help, is to take your time and choose a reputable agency that offers credit counseling services to help you make the best decisions for your situation so that you can get your debts paid off as quickly as possible and learn to live debt free. It is possible and there is help available, just remember "buyer beware".