The Definition of Debt Reconciliation

Individuals use debt reconciliation to retire delinquent credit accounts. Typically, credit card bills, which have been overdue for several months, require debt consolidation, to eliminate these high interest loans. After debt reconciliation, an individual will have much lower monthly payments, and their credit accounts will be current. This process is also known as debt settlement or debt consolidation.

Function

Many individuals get behind on credit card payments, due to frivolous spending or unforeseen circumstances. They choose to ignore their money problems, instead of facing them, causing credit card interest rates to skyrocket, and late fees to pile up. By the time they do address this problem, they are in a financial black hole. A common practice of debt reconciliation takes current monthly payments, and then rolls them into a single bill with a lower interest rate.

Benefits

When credit accounts are past due for too long, banks may write off these debts, and sell the loan to a third party collection agency. Since collection agencies do not pay full price for the loan, they may be willing to reconcile a debt at a lower price, saving you money. Individuals who roll all of their debts into a single monthly payment usually save significant amounts of money interest payments and late fees, and well as some financial room to breathe.

Considerations

Homeowners have much better opportunities for debt reconciliation, if they have significant equity in their home. By taking out a home equity line of credit or refinancing their mortgage, they can use this money to pay off high interest credit card loans. As of April 2010, mortgage rates hovered around 5 percent to 6 percent, as opposed to credit card interest rates of around 30 percent.

Time Frame

To initiate the debt reconciliation usually takes at least three months, because credit card companies do not want to accept less money than they are owed. After this time, they may send you an offer to pay off the remaining balance at a reduced rate, instead of selling the note to a collections agency. Homeowners, who qualify for a home equity line of credit or a refinance, may choose to remortgage their home immediately.

Warning

When utilizing a third-party debt reconciliation service, realize that some of these companies engage in predatory tactics. Services, which require upfront payments, are usually frauds. Sometimes, debt consolidation will just extend the debt window, meaning that you will stay in the debt trap for a longer time. In addition, longer loan terms mean that you will pay additional interest, over the lifetime of the loan.