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Questions About Debt Consolidation Companies

How do debt consolidation companies make money?

I wonder I always hear on the radio claims that company A reduced my debt from 40,000 to 10,000
How is that possible? And how do these companies make their money?

Industry Expert answers:

They charge you a fee to handle your situation. That’s how they make their money. Sometimes they work their fees into your monthly payment and the total still comes out less than if you were trying to pay all the bills separately.

Nobody legally reduces their debt from $40K to $10K without filing bankruptcy. Beware of those exaggerated claims.

If you are really behind in payments and the creditors think you are a heartbeat from filing bankruptcy, they will negotiate to reduce the amount you owe by about 30-35%. That’s how the consolidator gets your debt reduced, but not by 75%!

Are there any debt consolidation companies that really work?

With the current economy, and my work hours being cut, I’m in need of some serious credit card help. It’s now a decision between the credit cards and housing/food. If I could reduce my debt and make significantly lower monthly payments, it would be a life saver! Do any of these companies really do what they say? Also, what would be the impact on my credit ( as opposed to bankruptcy ), and how long would it take for this to drop off my credit bureau. I’d appreciate any advice.

Industry Expert answers:

Some of these companies are legit, but they often accomplish no more than you can do yourself by negotiating with your creditors, and is something you can accomplish for free.

A debt paid off by negotiation is reported in a derogatory manner, but not as bad as if you default and / or if it is charged off and sold to a collection agency.

All derogatories stay on your credit report for 7 years and a Chapter 7 bankruptcy can remain for 10 years. A Chapter 13 bankruptcy will remain on your credit report for 7 years, but often allows for a more reasonable repayment plan than straight repayment and the companies cannot assess further interest and fines.

My advice would be to get consumer credit counseling to explore your options. Go to http://www.nfcc.org/ and click the “Find a counselor” link (direct link: http://www.nfcc.org/FirstStep/firststep_01.cfm). Explain your situation to the counselor and they will advise you on how best to proceed.

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