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BBB on Differences Between Debt Consolidation, Debt Negotiation and Debt Elimination Plans

3/2/2009

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Debt Consolidation - Video Player: Woman with head down on a pile of bill Consumers are being battered on all fronts and offers from companies to help get them out of debt are extremely tempting in troubling times. Offers of debt negotiation, debt settlement, and debt elimination are three different options available to consumers. Better Business Bureau advises consumers to ensure they understand these critical differences before enlisting the help of a company to manage their debt or they could end up making their current financial situation worse. 

The unemployment rate in the US rose from 7.2 to 7.6 percent in January according to the U.S. Department of Labor and more families are struggling to make ends meet. While the unemployment rate continues to rise, so do complaints filed with BBB against companies that claim to help consumers manage their debt. In fact complaints against debt consolidation and negotiation companies rose by almost 19 percent in 2008 over the previous year.

“Consumers are bombarded every day with ads and e-mails offering services to manage or reduce debt and it’s hard to know which offer will work for them, let alone if the company can be trusted,” said Steve Cox, BBB spokesperson. “Families in debt may think their situation can’t get any worse, but trusting the services of some debt negotiation, consolidation or elimination firms can actually lead to increased debt and bigger headaches.”

To help consumers understand various options for dealing with debt, BBB offers a brief explanation of debt negotiation, consolidation and elimination services and tips on finding help to deal with debt:

Debt Negotiation/Settlement
Debt negotiation companies claim that they will negotiate with a consumer’s lenders to lower the total amount of debt owed for an upfront fee.  Unfortunately, some consumers who paid for debt negotiation services found out that the company never contacted their lenders, but instead, took their money and ran. Because the debt negotiation company made it sound like they had everything under control, the consumer stopped talking directly with their lenders and ended up slipping deeper into debt. Relying on debt negotiation firms could also put a dent in a consumer’s credit report.

Debt Consolidation
Debt consolidation companies offer to roll up various debts allowing the debtor to make one lower payment to the company, rather than many payments to the different lenders. While debt consolidation can make paying monthly bills more manageable, some companies tack on high fees and charge exorbitant interest rates, which means the consumer is paying much more in the long run. 

Debt Elimination
Companies that offer debt elimination rely on many different schemes but they all hinge on the notion that credit lines are illegal. Debt elimination companies typically provide, for an upfront fee, a document for the lender that supposedly absolves the consumer of the debt. Unfortunately, the document has no bearing whatsoever on the debt owed and consumers paying for such services have found that they’ve wasted money on a debt elimination scheme that would have been better spent on actually paying back their debts.

Before enlisting the help of a business to manage debt, BBB offers the following advice for consumers.

• Stay in contact with lenders and try to work out a plan with them first before enlisting outside help.
• Always check the company out first with BBB. BBB Reliability Reports on debt negotiation, consolidation, and elimination companies are available online for free at www.bbb.org.
• Start with a credit counseling service. Credit counseling services are often nonprofits that offer financial guidance for a small fee, or even for free. Click here for more advice on choosing a credit counseling agency.
• Beware of offers that sound too good to be true. There is no easy fix for reducing debt and any company that makes huge claims and guarantees, probably can’t deliver.

For more advice on dealing with debt including how to manage a budget, go to www.bbb.org.

 

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