How Debt Consolidation Through
A Credit Counseling Agency Works?
Most creditors offer
special repayment plans to their customers who undergo financial
hardship and enroll in a nonprofit consumer credit counseling
agency's debt management program. Upon enrollment, creditors
are then informed that their customer has entered a debt management
program and are asked that they reduce the client's monthly
payment, reduce or stop interest, stop late fees and over limit
charges, and to re-age past due accounts to bring them current.
Because most creditors support the agency, these special repayment
plans are usually accepted.
In the typical scenario, enrollment in the
program will reduce the consumer's overall monthly debt service
10% to 30% and reduce the average interest rate significantly.
In addition, once enrolled, correspondence from creditors regarding
past due accounts are directed to the agency. In other words,
in addition to the above benefits, the program puts an end to
upsetting collection calls and, financially speaking, offers
the consumer a new lease on life.
Unlike a lender providing a “debt
consolidation loan,” when
consumers consolidate their debt through a nonprofit credit
counseling agency, the agency does not then become the creditor.
In this regard, the agency is, in essence, a conduit for disbursing
payments to their client's creditors. While the consumer's original
creditor(s) retain all legal rights and may take legal action
should the consumer default on the negotiated payment, the agency
itself has no such rights, and in fact, has no interest in or
desire to take legal action. Contrary, the agency works “on
behalf of their clients” to
prevent such problems from occurring.
The only way to determine
if debt consolidation through a Consumer Credit Counseling Agency
would benefit a consumer is by analyzing the consumer's current
financial profile. If qualified, applicants may elect to enroll
in a debt management program offered through a federally designated
nonprofit charitable organization dedicated to assisting consumers
with financial difficulties.
What is a Debt Settlement or a Debt
Reduction program?
A Debt Reduction Settlement
is a process used by both debtors and creditors to settle
a debt for less than what is owed. If negotiated properly
on behalf of the debtor it can quickly and dramatically reduce
the debtor's debt. Settlements range from 20% to 80% of the
current debt, with the typical debt settled for 45 cents on
the dollar. After paying Agency fees, a typical client realizes
a savings of around 40% of their original debt placed in the
program.
Debt Reduction Settlements
are typically offered through third party debt negotiators
or attorneys as noted above. As this is an emerging industry,
there are few true professionals providing these services.
While more and more agencies are evolving, it is important
to deal with one that is highly skilled in the art of debt
negotiation, knowledgeable in debt collection, and who has
in-house legal counsel, in order to obtain the most favorable
settlement.
Which alternative is
right for you, debt consolidation or debt settlement?
You
may be asking, "Okay, so what is
better for me, enrolling in a Debt Management Program, or seeking
relief through a Debt Reduction Settlement?" The answer
is, it depends on many factors—and like everything
else in life, there are always trade-offs, The first
step in deciding what avenue to take is to consider the
type of debts you have which you would like to resolve.
As you will discover next, a Debt Management Program is
much more restrictive in the types of debts that are allowed
in the program. Therefore, depending on your objectives
and type of debt, the answer may be clear cut.
For some consumers a Debt Reduction Settlement may be their only
alternative. For other consumers it may be necessary to decide
which is a better alternative, and hopefully in reading the following,
a choice can be readily made. In some cases, seeking a Debt Reduction
Settlement on some accounts and enrolling the other accounts in
a Debt Management Program may prove more effective.
Below
we list various types of debts as they apply to the Debt Management
Program and Debt Settlements. In our next section we include a
number of important facts that must be considered. In reviewing
this material, you should be able to determine which alternative
is most appropriate for your needs. Remember, however, we are
only an email away and will be happy to assist you in arriving
at the right decision!
Which debts cannot be placed in the Debt Management
Program nor settled through a Debt Reduction Settlement.
- Mortgages
- Auto Loans
- Most Secured Debts*
- Child Support
- Bounced Checks
- Fines Stemming from Legal Matters
- Taxes**
- Student Loans**
- Some secured debts
may be settled when the "security interest" has
diminished in value to the point where repossession is impractical.
** Our government does
not negotiate. Taxes and government student loans are limited
to "payment
arrangements" and "offers
in compromise."
Which types of debts cannot be placed
in the Debt Management Program but may be settled for less than
what is owed through a Debt Reduction Settlement?
- Auto Leases
- Office Leases
- Equipment Leases
- Lease Defaults
- Repossession Deficiencies
- Liens
- Judgments
- Business Debts
- Business Credit Cards
- Debt Stemming From Lawsuits
- Rent Owed to Previous Landlords
What types of education loans are available?
There
are many different types of education loans. Learn about federal
and private education loans so that you can find the right loan
to help pay for your education.
Federal education loans
Federal programs are the single largest source of education loans. The two
primary programs are the Federal
Family Education Loan Program (FFELP) and the William
D. Ford Federal Direct Loan Program (FDLP). The loans available through
these programs start with the same terms; however, in the FFELP, your bank,
credit union, or school is the lender, and in the FDLP, the U.S. Department
of Education is the lender.
Listed below are some of the more widely used federal education
loans.
- Federal
Perkins Loans.
- Federal
Stafford Loans.
- Federal
Parent Loans for Undergraduate Students (PLUS).
Private education loans
Private
education loans are also available from a variety of sources
to provide supplemental funding when other financial aid does
not cover costs. These loans are not sponsored by government
agencies, and are offered by banks or other financial institutions.
Sallie Mae's private loan program for undergraduate and graduate
studies is the Signature Education Loan ® Program, a comprehensive
source of funding whereby federal and private loans are offered
as a package from a single, convenient source.
Other private supplemental loans are available and in some cases
are tailored to specific courses of study. Some examples include:
- LAWLOANS SM.
- MBA
LOANS SM.
- MEDLOANS.
- Signature Student Loans
What is Credit Reporting?
A
credit report is your personal credit payment history. Lenders
use it to decide whether to grant you credit. This history is
compiled and reported by credit bureaus; also called credit reporting
agencies, from information received through various grantors of
credit-credit card issuers, mortgage holders, banks, or even retail
stores that offer credit for purchases.
Your credit report shows your address, Social Security Number,
date of birth, how much you have borrowed through credit cards
or any other types of loans including student loans, and whether
or not you repay your debts on time.
Most information reported to credit bureaus
will remain on your credit report for seven years, and some bankruptcies
are listed for ten years. You may have no reason to think there
is negative information in your credit report and you are probably
correct. But it's a good idea to check. Credit agencies occasionally
make mistakes, and if your report contains inaccurate information,
the credit bureaus or credit repair organizations can provide
you with their procedure for disputing credit report information.
How
does the credit scoring system works?
Credit scoring
is a system creditors use to help determine whether to give
you credit.
Information about you and your credit experiences, such as
your bill-paying history, the number and type of accounts
you have, late payments, collection actions, outstanding debt,
and the age of your accounts, is collected from your credit
application and your credit report. Using a statistical program,
creditors compare this information to the credit performance
of consumers with similar profiles. A credit scoring system
awards points for each factor that helps predict who is most
likely to repay a debt. A total number of points — a
credit score — helps predict how creditworthy you are, that is, how
likely it is that you will repay a loan and make the payments when due.
Why
should YOU consolidate your student loan?
• Fixed
Interest Rates
• Lower Monthly Payments
• Money-Saving Payment Incentives
• Only One Payment Each Month
• New or Renewed Deferments
Everyone has his or her own reasons for consolidating. The reasons
listed above are just a few reasons why you may
consider federal student loan consolidation.
You can choose which of your loans you want
to include in your Federal Consolidation Loan; you can also choose
to consolidate your undergraduate loans while you are in graduate
school; you can even choose to consolidate only a portion of your
eligible loans.
