Credit Consolidation Services Can Prolong the Pain, and in many cases actually make matters much worse. Many of these services confuse the consumer by adding yet another program called the Debt Management Plan.
There are exceptions whereby a new loan maybe the right choice to consolidate and pay off higher interest unsecured debt with a lower interest secured loan against your property; this gives the added benefit of using the Interest Deduction on your Income taxes (check with your tax adviser). Properly managed the debt can be paid off sooner than it would have, and help to establish new positive credit on their credit reports.
Back to Debt Management Plans (DMP) for a moment. These programs make the assumption that the creditor will be willing to negotiate the debt to 60% of present value, and accept a payment plan administered by the company doing the negotiations on behalf of the client. What would motivate a creditor to do that in this economy?
Last week I met with a client that had been paying a fixed amount to a Debt Consolidation company since last January when things got really bad for him and his business. He attached five accounts to the program, and none of the money he paid out was ever applied to any of the debt on any of the five accounts. He had himself handled three of them directly to bring them current. Another had accumulated $40 monthly Late Fees and raised the interest to 29.99%. The real kicker is that the last account this company accepted into the program wasn’t even an unsecured debt; it was a Lease for equipment he needed to run his business. Secured debt cannot be part of these programs!
The theory behind these DMPs is to not pay the Creditor until they Charge-Off the account, and then the creditor would be seemingly willing to negotiate the balance. Of course the balance they are willing to negotiate down from has accumulated three to six months of Late Fees and Higher Interest charges. This negative activity is also published on the consumer’s credit reports. These are difficult to clear, and that is why I tell people these programs simply prolong the pain of bad, or poor credit.