Question:

How are debt consolidation, debt settlement (debt negotiation) and debt management plan (DMP) related?

Answer:

Debt consolidation, debt settlement or debt negotiation, as well as a debt management plan (DMP) are all attempts to minimize and pay off your debt. There are certain specifics involved with each of those options you may like to know about to make the best choice for yourself.

Debt consolidation is a nice way to go if you have equity on your house even if you have a mortgage and debts on top of it. You will be able to refinance, pay off some bills and even lower your monthly payments. A nice debt consolidation company may even help you sort out some bills with your creditors and reduce payoff. However, you will use up the equity on your home and your credit cards will be available again giving you the chance to incur some more debt. And if you default under a debt consolidation program, it may be very difficult to get back on track again and you are risking your property.

Debt settlement or debt negotiation can take place with a specialized for-profit company who will try to negotiate up to 50 percent reduction of your debt with your creditors but for the right fees which may account for more than 10 percent of your original debt, giving you a little over 20% overall debt reduction. Also, major credit cards institutions may offer a 50% or more reduction to cut losses, so why wouldn't you try to do debt settlement on your own and avoid paying costly fees?

Debt management plan companies (or the so-called DMPs) will get you to pay a lot. Not only will you have to pay all your debt, only restructured, but in fact you may have to pay over 130% of what you owe - all principal and interest. The convenience about using DMP is that you will be writing a single check to them and they will pay back to your creditors. It is your responsibility to make sure the DMP actually makes the payments to your creditors. Watch out when choosing a DMP as they could be a scam! Also, they may not get you out of debt as quickly as you need.

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