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How Debt Consolidation Works

Debt consolidation works by combining your payments on unsecured debts owed to creditors into one monthly payment, with other benefits such as lower interest rates or a reduced overall debt, depending on the type of plan you choose. Different plans work in different ways, but the aim is to help you get out of debt as fast as possible.

Why Should I Consider Debt Consolidation?

If you're at the point of wondering how debt consolidation works and whether it's an option for you, you're probably already struggling to meet payments on credit cards, personal loans, medical bills or other debts. You might be living paycheck to paycheck with no savings to draw on, borrowing from one source to pay off another, and possibly concealing your level of debt and expenditure from family and friends. You might even feel embarrassed, ashamed, or angry about finding yourself in debt. While it's understandable to feel a wide range of emotions; emotions don't get people out of financial difficulties, and neither does avoiding the problem. Taking action as soon as it's clear there's a problem saves stress in the long term, and makes it easier to find a solution to relieve debt before it gets further out of hand. Debt consolidation works for many people as a practical step toward that solution.

Some people can get out of debt on their own with careful budgeting and by using free money management tools such as these offered by CareOne. For others, it's time to seek professional help.

How Does Debt Consolidation Work for Someone Like Me?

There are two types of debt consolidation plans depending on your circumstances: a Debt Management Plan (DMP) or a Debt Settlement Plan (DSP). Both are designed to help you make affordable payments and reduce debts as quickly as possible, but each has its own pros and cons. Nobody can wave a magic wand and make your debts disappear overnight, and the process for either type of debt consolidation requires effort and commitment to your plan in order to emerge debt-free. However, avoiding the debt doesn't make it go away, and embarking on a proven strategy to tackle debt often leaves people feeling more empowered and relieved from the very first step.

Who qualifies for debt consolidation? To qualify a person must have at least $2,500 in unsecured debt, two or more accounts, and a source of income. Note that when we talk about debt consolidation, we don't mean a home equity loan or any other type of loan. That may be an option for some people, but we're referring to debt consolidation programs like a Debt Management Plan or Debt Settlement Plan, which do not require taking out a loan.

How Does Debt Consolidation Work with a Debt Management Plan?

A Debt Management Plan (or DMP) manages the amount of unsecured debt you owe to various creditors by rolling the debt into one monthly payment, according to an affordable amount you agree to pay.

The debt relief provider works with your creditors to obtain benefits on your behalf such as lower interest rates, lower monthly payments, and reduce or eliminate late fees or over the limit fees. You make one single payment each month to the DMP provider, and they distribute it to creditors. This option is the first choice for many people as it has less negative effect on credit ratings than a Debt Settlement Plan.

How Does Debt Consolidation Work with a Debt Settlement Plan?

A Debt Settlement Plan (or DSP) aims to settle your debts by negotiating a lower amount to pay back on the total sum you owe. For those who can't afford the payments on a Debt Management Plan, a DSP is a way to settle at least a percentage of the outstanding debt, and is an alternative to the drastic step of choosing bankruptcy.

With a DSP, you make monthly payments that you can afford to your debt settlement provider for deposit into an escrow account. Meanwhile, the provider negotiates with creditors for a lower settlement on the outstanding sums you owe. Once an agreement is reached, the deposited funds are paid to the creditors. This option has a negative impact on your credit rating, but helps you avoid bankruptcy.

Which Method of Debt Consolidation Works Best for Me?

These CareOne fact sheets on Debt Management Plans and Debt Settlement Plans provide more details on the pros and cons of each plan. Buyer beware: Debt relief companies that offer only one type of plan are naturally keen to promote that as a solution to anyone enquiring about how debt consolidation works, even though it may not be the best option for every person.

Therefore it's important to do your homework to explore which type of debt consolidation works most effectively for you and your family's circumstances. Or consult a company like CareOne that offers multiple plan options and can discuss and evaluate without bias which approach to debt consolidation works best for your personal situation.

To help you decide which option is right for you, read this blog outlining Questions You Should Ask Before Signing Up for a Debt Relief Plan.

What Support Can I Expect to Ensure Debt Consolidation Works for Me?

A reputable debt consolidation provider will provide advice and counseling without judgment, and their program may include money management tools and other resources to help you take control of your financial future. Community forums are helpful to receive practical and moral support from others who have overcome the challenge of debt, or who are currently tackling the same problems. Just knowing that others have been in the same boat and they're working through their debt or have a success story to tell makes a big difference. Experienced forum members also share tips, stories, and encouragement.

For example, Susan (who's now saving for a trip to Hawaii) discusses in an interview what made her seek professional help with her debt problem, and how debt consolidation works for her as a CareOne Community member.

To learn more, read our Debt Consolidation Guide for further details on how debt consolidation works to help people resolve their debts and manage their financial future.

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