When a person walks into one of the credit consolidation services looking for a way to avoid bankruptcy and return normalcy to their financial life, most believe they are getting expert advice. With many of the companies offering these services, they do receive advice on how to consolidate their debts and avoid falling back into the same trap, but others may not be as well versed on how to make this happen.
Dealing with a massive debt load can be a daunting experience for many people and they begin to feel that getting out from under their debts is going to be a lot harder than it was to get into financial trouble. For the most part, that would be a correct assessment and when attempting to deal with numerous debtors at the same time, they believe their only alternative is to declare bankruptcy. While bankruptcy can put an end to the phone calls from creditors and stop most collection efforts, it can be an expensive proposition as well as have a devastating effect on their credit report.
That is not to say that joining in a program through credit consolidation services will boost their credit score, but it does indicate the person is trying to pay down their obligations. Additionally, while participating in these programs, participants are urged to refrain from taking on any additional debt.
Typically, those working for credit consolidation services are experienced in dealing with creditors and can often have the balance owed reduced by eliminating charges tacked on as late fees or over the limit fees on credit cards. Once a total balance of the debt is established, the debtor can usually pay only a maximum of 25 percent of their monthly net pay, the amount allowed by federal debt collection laws.
The amount collected is then distributed to all lenders, based on a percentage of the total debt and as each smaller debt is eliminated, the money is distributed among a smaller pool of debtors. The credit consolidation services also include a portion of the payment to help pay for their services as well as postage and charges for sending out the checks to the lenders every month. As long as the debtor makes their regular payment there is usually no contact with the lenders.
However, unlike bankruptcy, lenders are under no obligation to agree to the terms of credit consolidation services and in some cases refuse to participate. The debtor will have the choice under these circumstances to maintain monthly payments with these lenders while retaining the others through the process by the credit consolidation services. If their disposable income allows them the cash to make these additional payments, they may choose this option. If not, they may seek protection through Chapter 13 bankruptcy.
Bankruptcy under Chapter 13 is credit consolidation services administered by the bankruptcy court, under control of a court trustee. While the stigma of bankruptcy attaches itself to the individual, it is also mandated by the court that all debtors accept the payments approved by the court.
