If you’re dealing with personal and unsecured debt, like credit cards or medical bills, navigating financial terms can be confusing. The terms describing the entire debt settlement industry are used interchangeably, misleading the consumer. It can be challenging to find the right solution for you if you can’t fully understand your options.
Last year, Nerdwallet released a study on the “2021 American Household Credit Card Debt.” The average credit card debt per household is $6,006, down 13.8%. Despite that, one in five Americans experienced higher prices and lower wages, so they relied heavily on credit cards to pay for necessities during the pandemic.
This kind of debt has affected millions of Americans emotionally and physically. Remember, debt is something you have, not who you are, and you have options.
One way to erode the stress connected to debt begins with understanding the diverse types of aid available. Being clear about those terms is critical for finding the right fit from a reputable financial management organization to restore your peace of mind.
The debt settlement industry got its name because it offered clients assistance to settle personal debt and alleviate their stress. A synonym that has been used is “debt resolution” because that is the goal — creating a resolution to stressful personal finance challenges.
Financial organizations such as banks, credit counseling firms and even bankruptcy attorneys have used three separate terms interchangeably within the debt settlement industry. However, they mean different things. It’s essential to understand the differences and what they mean to take the proper steps for your specific situation.
1. Debt management
Consider debt management if you can’t repay your debt or aren’t skilled at personal finance activities like balancing a checkbook. Most people worry about damaging their credit by their inability to pay bills on time, so they call a credit counselor for help.
After hearing the situation, if appropriate, the counselor will typically ask a client to consider enrolling in a debt management plan (DMP). Based on an initial conversation, the debt management counselor designs a detailed plan to help you create and adhere to a budget while learning necessary money management skills.
Additionally, the DMP company may call your creditors and ask for a reduced interest rate or waive specific fees. Your requests may not be approved. If that happens to you, another possibility is considering debt consolidation.
2. Debt consolidation
Out-of-control debt can feel like a downward spiral that pulls you down with it. The cyclone involves multiple creditors, several payments and immense stress. A debt consolidation loan becomes a possibility because it’s easier to pay one general payment than several smaller ones.
If you have a strong enough credit score, you can visit online lenders or a few storefronts to get approved for a debt consolidation loan. That will roll all your bills together and make up an average – and often lower – interest rate. The loan types can vary, including a home equity loan, a 401(k) loan, a balance-transfer credit card, or an actual debt consolidation loan.
What if you don’t qualify for a debt consolidation loan due to poor credit? You likely feel stuck, but debt resolution may be an option you haven’t considered.
3. Debt resolution
Debt resolution helps cut your total debt owed, while a debt consolidation loan helps minimize the total number of creditors you owe. Every day, reputable debt resolution organizations operate in full compliance with the Federal Trade Organization’s Telemarketing Sales Rule throughout the process.
It is essential to know that you should never have to pay any “resolution” fees until you’ve made at least one payment toward your settlement with a creditor. The company works on your behalf throughout the process as you make deposits into a private trust or escrow account used only to pay off debts enrolled in the program.
Most importantly, debt resolution is a bankruptcy alternative. You do not have to file bankruptcy if you can’t get a loan. Debt resolution allows you the right to pay back what you owe at a negotiated rate you can afford. It’s best to do your research to understand the facts and choose the proper remedy. For more information about managing and resolving your debt, visit BeyondFinance.com.