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Debt consolidation – A legal solution to your debt problems

By J. H. Marman, Associate Attorney, Oak View Law Group

What is debt consolidation?

Debt consolidation is a procedure where several unsecured debts having high interest rates are consolidated into a single and affordable monthly payment.

When should you consolidate debt?

You can consolidate debt under the following circumstances:

1. You're unable to tackle multiple bills simultaneously.
2. You often miss your payments.
3. You're making late payments frequently.
4. You're getting creditor calls everyday.
5. You're short of cash.
6. You're using credit cards to pay your bills.
7. You're planning to take out a cash advance loan.

What kinds of debts can you consolidate?

Here are some debts which you can eliminate through unsecured debt consolidation program or service:

• Credit card bills
• Unsecured loans
• Utility bills
• Hospital bills
• Payday loans

Debt consolidation program – Is it a legal solution?

Debt consolidation is legal as long as the companies offering this program or service follows the FTC, state and federal rules. For example, the consolidation companies can't charge any fee before signing any contract with the consumer. Nor can they charge sky-high fee upon the cash-strapped consumers. Check out the FTC disclosure before enrolling into the consolidation program.

How debt consolidation affects credit score?

Whenever you enroll in any debt relief program, it has an effect on your credit rating. Enrolling in a debt relief program will not improve your credit score immediately, but as you continue to add positive information on your credit report, your score will start increasing.

Generally, the effect of personal debt consolidation on your credit score is better than that of bankruptcy. Unlike bankruptcy, a consolidation program does not destroy your credit rating. Rather it makes a positive influence on your credit score. If you're regular with your monthly payments on all your debts and do not incur any new debts, your score improves. A consolidation program will let you repay bills at a lower interest rate, thus making your monthly payments manageable. This will diminish the negative effects on your credit report, paving way to boost your credit score.

What are the pros and cons of debt consolidation?

Pros	Cons
1. Slashes interest rates on credit card debts	1. You may end up paying more, since you stretch the repayment term
2. Cuts down your monthly payments
3. Wipes out late fees and penalties	2. You may accrue more debts, if you don’t change spending habits
4. Helps you repay debts through an affordable single payment plan
5. Offers freedom from legal hassles and complications	3. You will still be liable for the debts
6. Helps you with budgeting and money tips in the counseling session
7. Gives professional advice to solve your financial problems	4. You may still get calls from creditors
8. Helps you get some relief from the continuous creditor calls
9. Can help you to avoid bankruptcy	5. You can only use it to pay unsecured debts
10. Puts an end to multiple payments

How the program works?

Debt consolidation programs are services offered by professional corporations in order to help you consolidate several unsecured debt into a single monthly payment. The key purpose behind debt consolidation programs is reduction in the overall debt burden by cutback in the interest rates.

Check out the various stages involved in a debt consolidation program.

1. Get free financial counseling: The debt consolidators will have a look at your financial health first. They will ask you different questions to get an idea about your financial health. They will compute how much revolving debt you're carrying on your shoulder. You'll be asked to look at all the bills and calculate the total debt amount.
   After the debt consolidators/consultants get an idea about your total outstanding payments, they will ask you to attend a free counseling session. They will suggest useful tips which can help you take care of financial health in a better way. Ask all your questions regarding debt consolidation service to the consultant. He will solve all your doubts and queries on the debt consolidation services.
2. Sign the written agreement: If you're convinced that you really need debt consolidation help, then ask the consolidator to send the written agreement at your home. Read each and every clause of the agreement prior to signing it. If you have any question regarding fee or service, then call the consolidator and clarify your doubts.
3. Get fewer collection calls: After you have signed the written agreement, inform your creditors/collectors that you have enrolled into a consolidation program. Henceforth, all your creditor calls will be handled by the consolidation company. If you receive calls from the creditors, then request them to contact the consolidators in future. However, keep it in mind that the creditors are not compelled to comply with your request.
4. Go through the payment plan: The consultant prepares a payment plan suitable to your financial health and forwards it to the creditors/collectors. The consultant uses his negotiation skills to convince the creditors to reduce the interest rates and eliminate the late fees on your unsecured debts.
5. Start making the payments: The creditors review the payment plan proposed by the consultant. If they like the plan, then they will accept it without making any further delay. Once the payment plan gets accepted, start sending monthly payments to the consolidation company. The consultant will forward the money to each of your creditors as per their individual share.
   The consolidation company takes the responsibility of sending the payments to the creditors. You don't need to do anything about it. So you need not worry about tackling multiple high interest bills anymore. All your unsecured debts are consolidated into an affordable monthly payment plan. You just need to make the payments every month on time.
6. Re-evaluate your financial health: Your financial health will not remain same all the time. It may deteriorate anytime. If such a thing happens with you, then it is advisable to update the consultant about it. The consultant will re-negotiate with your creditors, and arrange another payment plan suitable to your financial health.

Do you need to consult a debt consolidation lawyer?

It is very hard to understand the complex state and federal laws governing the debt industry. Here, a debt consolidation attorney can help you understand the laws clearly. Moreover, a lawyer can also assist you in any legal issue that may appear in future.

Here are some of the benefits of a seeking debt consolidation advice from an attorney:

• Legal knowledge: An experienced attorney has a profound knowledge on debt and financial laws. As such, he would provide you with proper guidance keeping in mind the legal issues.
• Legal representation: A good attorney or a law firm can help you in getting legal representation if situation demands.
• Legal papers: You may have to sign some complicated legal papers. An experienced attorney will know the proper way to fill out the papers. He will guide you in filling out the document without committing a mistake.
• Harassment issues: Creditors/collectors tend to avoid using aggressive tactics if an attorney/law firm is involved in the negotiation process. This is mainly because a consolidation attorney may immediately sue a creditor in the event of debtor's harassment.
• Good negotiating skills: Usually, attorneys are excellent negotiators. You may feel nervous in front of your creditors, but your attorney can handle them perfectly.

Are there any other ways to repay bills apart from consolidation?

The consolidation process is the easiest and safest option to get out of debt. However, if you do not have any inclination to consolidate bills, then you may resort to other debt relief options which are listed below:

Debt Settlement: Debt settlement helps you overcome your debt by negotiating lower payoff amount with your creditors.

Debt management: In this plan, a credit counseling agency or the debt management company deals with the creditors to lower the interest rates on the unsecured debts, and develop an alternative repayment plan.

Bankruptcy: Bankruptcy should be your last resort to get out of debt. Bankruptcy damages your credit score by 200-250 points.

If you are knee deep in debt and thinking of filing bankruptcy, you should consider all your options. If your financial situation is not too terrible, then consumer debt consolidation is a good way to save yourself from harassing and threatening calls from creditors , and restore your damaged credit score gradually.

6 debt consolidation tips you should follow

Check out the 6 consolidation tips which you should follow:

1. Inform your creditors: Notify the creditors/collectors about your enrollment, and make sure you get a receipt from them after each payment. This helps you avoid scams later.
2. Keep a record: Maintain a record of your payments and ensure that they are properly updated.
3. Send regular payments: Make your monthly payments on time.
4. Devise a plan: Develop a strategy to make the required payments. Look for ways to pay off your debts in a timely manner.
5. Earn more: Make money online and use the dollars to pay back your creditors sooner.
6. Check credit report: After you have paid back your creditors, pull your credit report, and find out if the status of the accounts has been updated as "Paid in Full".

What are the 11 ways to select the best debt consolidation company?

Often, consumers are not comfortable about consolidating debts on their own. In such a situation, it will be wise to get debt consolidation help from a professional company. Check out the following tips that can help to select and work with the best debt consolidation company in your state:

1. Accreditation: Before signing any contract with the consolidation company, find out if they are accredited by National Foundation for Credit Counseling (NFCC) or Association of Independent Consumer Credit Counseling Agencies (AICCA). Usually, reliable debt consolidation companies are member of these organizations. Moreover, find out if the company is accredited by Better Business Bureau.
2. Recommendation: Ask your family members if they know about a reliable consolidation company. If any of your friends has worked with a consolidation company in the past, then ask him to give you the contact details. Get in touch with company representative and start the preliminary discussion.
3. Consumer feedback: Any good consolidation company will have its own website. Go to the "customer feedback” or "client testimonials” section of the website. Read through the testimonials, and find out what the present and past customers have to say about the service of the company. If the greater percentage of the customers is happy with the service of the debt consolidators, then you may think about striking a deal with the company. If there are too many unresolved customer complaints against the company, then it is advisable to not work with the debt consolidators.
4. Success rate: Check out the success rate of the consolidation company. The success stories will give you a fair idea about the negotiation skills of the debt consultants. Figure out how many people have actually been able to clear their debts with the help of the consolidators. Many a times, the consolidators fabricate success rates to lure customers. So, talk with the existing customers to verify the claims made by the consolidators.
5. Reviews: You can get online reviews of consolidation companies from different websites. You can also go to various financial forums, and find out what the experts have to say about the services of the company. If most of the people have negative opinion about the services of the company, then it is definitely not the best debt consolidation company.
6. License: Many states require consolidation companies to be licensed. Some states even require the consultants to be licensed. So, check if the company is licensed in your state. Contact your State Attorney General to know whether or not the consolidation company is licensed to operate in your state.
7. Expertise: You need to know if the consultant is qualified enough to give you counseling, and help you get out of debt. Get to know whether or not the consultants are certified by a reliable organization. Ask different questions to the consolidator. If he can give you the correct and informative answers, then it signifies that the consultant is a good one.
8. Fee: You may not be aware that FTC has banned the debt relief companies from charging upfront fees. If the debt consolidators ask you to pay an advance fee before enrolling into a personal debt consolidation program, then refuse to make any payment. It is better to not enter into any agreement with the company only. This is a sign of a debt consolidation scam.
9. Contract: Before sending payments to the company, ask the consolidator to draw up a contract. Abstain from entering into any kind of verbal agreements as they are not legally binding. Once the contract is made and mailed/faxed to you, go through the terms and conditions of the agreement. Only when you understand the clauses of the contract, put your signature on the paper.
10. Privacy: The consolidators will be handling your confidential details. So, you need to know whether or not your vital financial information will not be leaked to the other people. Identity theft cases are rampant in the country. You would dislike being its latest victim. So, ask the consolidators about how they will handle your financial information. Ask if they have any kind of privacy policy.
11. Contact details: Good consolidation companies will have a proper mailing address, phone number, fax number, and email address. So, find out if the company you're planning to work with has proper contact details.

How can you avoid debt consolidation scams?

In recent years, debt relief industry has been flooded with scams. A lot of consumers get cheated by unscrupulous companies while looking for financial help. You should be particularly careful while trying to find online debt consolidation companies. Also, a company may not be a scam but the service it offers may not be satisfactory. Check out the following points to avoid consumer debt consolidation scams:

1. Do not select a company that is not licensed: A fraudulent company or the attorney does not have the appropriate license.
2. Avoid companies who try to pressurize you: Maintain a safe distance from companies who try to pressurize you into making quick decisions or make false promises. Stay away from spam emails, letters, and phone calls by the company.
3. Avoid companies asking upfront fees: Stay away from those companies that ask for fees before your situation has been evaluated.
4. Ignore companies making impossible promises: You haven't accumulated debt in one single day. So, you can't get rid of it within 2-3 days either. It will take several months to clear all your dues. Any company which makes a promise of getting you out of debt within a week is fraudulent.

Can you consolidate debts on your own?

YES, you can do it through a debt consolidation loan (secured or unsecured) or through a balance transfer credit card.

Can you get free debt consolidation services?

There are nothing called free debt consolidation services or free debt consolidation programs. You need to understand and accept this fact. You'll have to pay for using debt consolidation service. You'll have to pay a fee after a written agreement has been signed, a payment plan has been agreed upon, and the creditor has received minimum one payment. You'll have to pay a fee on the portion of the money saved in overall. Even then, the consolidation companies can't charge an enormous fee for its services.

Should you go for non-profit debt consolidation?

If you're thinking that "I will consolidate my debt by paying a small fee", then non-profit debt consolidation is a good option for you. A non profit debt consolidation company works just like a normal for profit consolidation company. They will communicate with your creditors and help you consolidate bills through one easy monthly payment plan.

Contrary to the popular notion, the non-profit companies do charge a nominal fee for the services provided by them to the consumers. These companies mainly thrive on donations made by various individuals and companies. If you're really interested in working with a non-profit debt consolidation company, find out if they have a 501 (3) (c) certificate from the IRS. This will help you know if it really is a non-profit consolidation company.