There are a variety of myths concerning debt consolidation programs: Some guarantee to make all your debt go away or that you will be able to settle your debt for pennies on the dollar while others talk of bogus government programs or grants designed to bail out people with high amounts of credit card debt. Many more claim they can stop your creditors from suing you. In any case, these statements are false and warned against specifically by the Federal Trade Commission.
Bankruptcy
The only way that you can be guaranteed to settle your debt for pennies on the dollar, make some of your debt go away or stop creditors from suing is to file for bankruptcy. Even then, certain debts will be excluded from discharge or settlement, such as child support, fines, back taxes and many student loans, and, unless you can afford to catch up on missed payments or come to some settlement, you may not even be able to prevent a creditor from placing a lien on your property.
Damage Control
That is not to say that debt consolidation programs are not without their benefits. The benefits you receive will depend a little on how the debt consolidation program you choose works. No matter what type of program you choose, there will be fees to pay, and the total interest you pay over the course of the loan will likely be higher than if you continued to make payments normally. The trade-off is that you have a single monthly payment and you typically pay less per month than you would have before consolidation.
Types of Debt Consolidation Programs
There are two basic types of debt consolidation programs: those that merely administer your payments (i.e. you make payments to them and they distribute payments to your creditors) and those that actually extend you a loan that is used solely to repay your debts. In both cases, the debt consolidation program will negotiate with your creditors to bring down your interest rate, have certain fees waived or reduce your principal.
The Risk of Being Sued
As long as your debt remains with your creditors, if you do not make your payments, you can be sued. What happens is the creditor files a motion with the court. If they win, a judgment is entered against you specifying the amount you owe. At this point, your creditor can use the judgment to obtain a wage or bank account garnishment. Again, the only way you can prevent a creditor from suing you for an unpaid debt is if you file for bankruptcy.
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