Credit Card Debt Consolidation
Many Virginia residents struggling with credit cards and other unsecured debts are looking for a debt relief option that will provide much-needed relief, and possibly save them a substantial amount of money each month. In seeking relief from a debt consolidation program, consumers will combine or "consolidate" all of their high-interest unsecured debts into a single, less stressful payment each month made to a debt consolidation company. The debt consolidation, or credit counseling company then distributes payments on time to each of your creditors until all debts in the program are paid off, or resolved. However, before going further into the details of a debt consolidation program, it's important to understand how a credit card debt consolidation program differs from a debt consolidation loan.
Comparing Debt Consolidation with a Debt Consolidation Loan
While the goals of both debt consolidation debt relief and a standard debt consolidation loan are very similar, the method of getting relief is quite different. In the case of a debt consolidation or debt management plan coordinated by a credit or debt counselor, the goal is to gain an understanding of the debt load a consumer is facing, the amount of money each month that can reasonably be allocated to payoff or pay down debts, then design a personalized plan that "consolidates" multiple high-interest consumer debts into a more affordable and more structured payment plan each month. These plans allow consumers to resolve debts as quickly as possible, at a pace they can afford.
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In comparison, a debt consolidation loan involves taking multiple high-interest credit cards and other debts and paying them off all at once with the proceeds from a debt consolidation loan. In theory, it seems as though a debt consolidation loan can "convert" multiple high-interest debts into a single, lower interest rate loan. However, Virginia residents should be aware that they typically require collateral, such as a home or other asset, for loan approval. That means consumers, already struggling with debts, will be putting their home or other large asset at risk if future financial hardships were to arise. Essentially, they may have traded "unsecured" debt that doesn't put their home at risk into a "secured" debt that puts their home at risk.
In addition, many consumers who pay off credit cards with a debt consolidation loan actually end up accumulating additional credit card debts quickly. In this scenario, the cycle of debt continues as consumers now have BOTH a debt consolidation loan and multiple high-interest credit cards to deal with. Thus, the situation has gone from bad to worse.
How Debt Consolidation Works
Debt consolidation, also known as a debt management program (DMP), combines or consolidates multiple high-interest consumer debts into a single, more manageable and more structured monthly payment. Through the benefits of debt relief such as lower, more lenient, interest rates and the waiving of late fees and penalties, a debt management plan coordinated by a credit counselor or debt counselor can be provide personalized assistance for consumers who need a proven, predictable, and accelerated path out of debt.
In order to customize the plan for the consumer, a credit counselor (or debt counselor) typically will interview consumers to gain a clear understanding of all of their debts. Then they will conduct a budget analysis with consumers to find out how much money can be realistically allocated each month to pay down those debts. Based on the information they've gathered, they will come up with a game plan (a debt management plan or DMP) and send proposals to each of the consumer's creditors requesting the benefits of debt relief for the individual or family experiencing financial hardship. These benefits can include lower interest rates, a waiving of late fees and penalties, and generally more favorable repayment terms. Those creditors who agree to the proposals are then added to the debt management plan. For those that do not, consumers are still obligated with creditors according to the terms of their original agreements. Overall, it's important to remember that debt consolidation or debt management plans can be very effective and save a substantial amount of money IF consumers STOP using credit cards and begin the process of paying down the principal amount of debt on time, month after month, at a LOWER INTEREST RATE.
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State Financial Assistance
Although the state government of Virginia does not provide debt grants or programs to help consumers resolve their debts, it does provide a variety of programs for individuals and families who are low-income or need a helping hand while experiencing difficult circumstances. These programs are specifically designed to provide more immediate financial assistance and relief, and helps individuals and families with children get access to food, healthcare, and other basic necessities. Virginia also has agencies that can assist with housing concerns and help consumers avoid foreclosure. To learn more about these services, go to the state's homepage and click on the Benefits page.
Comparing Debt Consolidation with Debt Settlement
It's important to know that debt consolidation requires discipline and typically three to five years to complete the program and take advantage of all the money saving benefits. On the other hand, a popular alternative to debt management is debt settlement, considered a more aggressive form of debt relief. Debt settlement may help consumers, facing the prospects of bankruptcy, get out of credit card debt faster, assuming they can accumulate money in a "set aside" designated account which can later be used as the funding source to reach a settlement with individual creditors.
It's customary in debt settlement, that if consumers fall seriously behind in payments, credit card companies can decide to eventually "sell off" debt as "bad debt" to a collection agency. In this scenario, creditors may get as little as 10 cents on the dollar, so it stands to reason that credit card companies may be willing to accept a reasonable settlement offer made by the consumer or by a debt settlement company working on the consumer's behalf to negotiate a settlement. Be aware that when consumers default on the terms of credit card agreements in order to set aside monies in a settlement account, creditors may threaten or take legal action. In addition, money saved through credit card negotiated settlements are subject to federal taxation. Finally, debt settlement typically will have a negative impact on one's personal credit, but not as serious or long lasting of an impact as personal bankruptcy.