Debt Consolidation

The debt consolidation process usually starts with a debt strapped consumer struggling to stay above the proverbial rising tide of credit card payments. The promise of debt consolidation to that struggling consumer is that he or she can roll multiple lines of consumer debt, usually credit cards, in to one line with a lower overall interest rate and a single monthly payment in a fast and easy process. That new single monthly payment is sent by the consumer to the new creditor who then relays payments to the original group of creditors. The more diligent debt consolidators will target the higher interest credit cards first, paying more to them to knock down the outstanding balances at a faster rate. If that process works as planned, instead of just paying interest charges each month, the consumer will eventually be able to put more money each month toward reducing the outstanding principle as long as payments remain constant.


The preceding is basically a “perfect world” scenario relying on ample credit availability, interest rates that stay constant, and steady economic factors. The risks and potential for trouble in a debt consolidation can increase rapidly if the “real world” scenario doesn’t match up with the perfect one. The current economic environment, for example, has virtually dried up credit, has some rates moving down while others are exploding upward, and has the overall job market walking on pins and needles. These events have, in turn, affected the mechanics of how the consolidated debt packages work. For instance, over the past year, tight credit markets have made getting unsecured debt extremely difficult, especially for the type of profile that is looking for a consolidation.


That has left most consumers with secured debt as their only option, and even those are hard to come by. Those that proceed with a debt consolidation are now trading unsecured debt for secured debt, probably in the form of their own home. Now, should the borrower lose a job or have a decrease in income to the point where payments are being missed the property securing the consolidated debt could be in danger. Another issue is the extension of time to pay off the consolidated debt as consumer finance companies raise their rates to compensate for the well-documented losses in other areas of their portfolios. These time extensions can cost consumers dearly as the original process reverses and instead of reductions in principle, the amount owed, and the interest charged on it, goes up.


At the heart of debt consolidations of is the fact that debt is being paid off with another type of debt. This type of program can work as long as the economy cooperates and the consumer has the discipline to stay with a long-term program. Consumers should examine all the risks involved in a debt consolidation, including checking the background of the company providing the service.


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