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Debt Consolidation : Glossary of Debt Consolidation Terminology

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Need Clarification on Debt Related Terms?

Credit Counseling
A process of offering education to consumers concerning ways to repay existing debts and avoid incurring additional debts. Credit counselors may negotiate with creditors to establish a debt management plan (DMP) for a consumer as a means of repaying existing unsecured debts. A DMP typically offers reduced payments, waived fees and interest concessions as dictated by the individual creditors.

Additional information: The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (external link) made credit counseling a prerequisite to filing bankruptcy. A debtor must complete a program with an approved credit counseling agency during the 180-day period prior to filing bankruptcy. Additionally, a post-filing credit counseling session is further required to complete the bankruptcy process.

Creditor Benefits
When you enroll in debt consolidation program or a debt management plan (DMP), the relationship between the credit counselor and your creditors is the key to how much you can save. Creditor benefits may include reduced interest rates and the elimination of late and over the limit fees. These benefits typically result in a significantly lower monthly payment.
Debt Consolidation
If your debt is spread across multiple creditors, a way to better manage those bills is to group them together into one payment through consolidation. Typically with a process, such as credit card debt consolidation, the company (excluding lenders) you work with has established relationships with creditors that allow them to secure better repayment terms such as lower interest rates and reduced fees. These benefits can allow the debt consolidation company to negotiate a lower monthly payment. Debt Consolidation (when it is not in the form of a loan) is also often referred to as a Debt Management Plan (DMP) which is accomplished through credit counseling programs.

How it works: Each month you make one payment to the credit counseling organization. They in turn use the funds to pay your unsecured debts, like your credit card bills, student loans, and medical bills. A successful DMP requires you to make regular, timely payments, and could take 48 months or more to complete. You agree not to apply for or use any additional unsecured credit while you’re participating in the plan. You may still apply for secured debts such as an auto loan or a mortgage.

Debt Consolidation Loan:
Debt consolidation can come in the form of a loan used to pay off multiple debts. Loans involved in the debt consolidation process are typically taken out against a secured asset such as house but can also come in the form of an unsecured personal loan. This method of consolidation is used to secure a lower and/or fixed interest rate in addition to the ease and convenience of a single payment. Debt consolidation through home mortgage refinance carries the risk of foreclosure if the debtor cannot keep pace with the new payment once the debts have been consolidated.
Debt Relief:
A generic term used to reference a variety of debt repayment methods such as credit counseling, debt management plans, consolidation loans, home mortgage refinancing, etc.
Debt Settlement:
An aggressive form of debt relief which may be appropriate for individuals whose debts total in excess of $10,000. Debt Settlement is also commonly referred to as Debt Resolution and Debt Elimination. Under a debt settlement program, a settlement company will negotiate with creditors to lower the outstanding balance of their debt. This differs from debt management plans where the credit counseling agency negotiates lower interest rates. Monthly payments made under a debt settlement program are placed in a settlement fund or an escrow account in anticipation of reaching a settlement with creditors. The funds are not distributed to creditors on a monthly basis as in debt management. It is important to note that some creditors will never settle for an amount less than owed and reserve the right to take legal action against the debtor.
Debt Solutions:
A generic term used to reference a variety of debt repayment methods such as credit counseling, debt management plans, consolidation loans, home mortgage refinancing, etc.

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