Clear definitions of financial industry terms help people move beyond debt
If you’re dealing with personal, unsecured debt, like credit cards or medical bills, navigating financial terms can be confusing. Terms describing the entire debt settlement industry are used interchangeably, misleading the consumer. It can be difficult to find the right solution for you if you don’t fully understand your options.
Last year, Nerdwallet published a study of “US household credit card debt in 2021.” The average credit card debt per household is $6,006, down 13.8%. Despite this, one in five Americans have experienced higher prices and lower wages, so they have relied heavily on credit cards to pay for their necessities during the pandemic.
This type of debt has emotionally and physically affected millions of Americans. Remember that debt is something you have, not who you are, and you have options.
One way to ease the stress of debt starts with understanding the various types of help available. Being clear about these terms is essential to finding the right fit with a reputable money management organization to restore your peace of mind.
The debt settlement industry got its name from the fact that it provided customers with assistance in settling personal debts and relieving stress. A synonym that has been used is “debt resolution” because that is the goal – to create a solution to stressful personal finance challenges.
Financial organizations such as banks, credit counseling firms, and even bankruptcy attorneys have used three distinct terms interchangeably in the debt settlement industry. However, they mean different things. Understanding the differences and what they mean is key to taking the appropriate action for your specific situation.
1. Debt management
Consider debt management if you can’t pay off your debt or aren’t good at personal finance-related activities, like keeping a checkbook. Most people worry about hurting their credit due to their inability to pay their bills on time, so they call a credit counselor for help.
After hearing the situation, if any, the counselor will usually ask a client to consider enrolling in a debt management plan (DMP). Based on an initial conversation, the debt management counselor designs a detailed plan to help you create and stick to a budget while learning the necessary money management skills.
Additionally, the DMP company can call your creditors and ask for a reduced interest rate or waive specific fees. Your requests may not be approved. If this happens to you, another option is to consider debt consolidation.
2. Debt consolidation
Uncontrollable debt can feel like a downward spiral dragging you down with it. The cyclone involves multiple creditors, multiple payments, and immense stress. A debt consolidation loan becomes a possibility because it is easier to pay one general payment than several smaller ones.
If you have a strong enough credit rating, you can go to online lenders or some storefronts to get approved for a debt consolidation loan. This will bundle all your bills together and be an average – and often lower – interest rate. Loan types can vary, including a home equity loan, 401(k) loan, balance transfer credit card, or debt consolidation loan.
What if you don’t qualify for a debt consolidation loan due to bad credit? You probably feel stuck, but debt resolution may be an option you haven’t considered.
3. Debt Resolution
Debt resolution helps reduce your total debts, while a debt consolidation loan helps minimize the total number of creditors you owe. Every day, reputable debt resolution organizations operate in full compliance with the Federal Trade Organization’s Telemarketing Sales Rule throughout the process.
It is essential to know that you should never have to pay a “resolution” fee until you have made at least one payment towards your settlement with a creditor. The company works on your behalf throughout the process when you make deposits into a private trust or escrow account used only to pay off program debts.
More importantly, debt resolution is an alternative to bankruptcy. You don’t have to declare bankruptcy if you can’t get a loan. Debt resolution gives you the right to pay off what you owe at a negotiated rate you can afford. It is best to do your research to understand the facts and choose the right remedy. For more information on managing and settling your debts, visit BeyondFinance.com.