Two of the most popular forms today for getting out of debt are consolidation and counseling.

Debt Consolidation
 is the process of combining multiple consumer debts or liabilities (i.e. credit cards, personal loans, etc) into one loan.

Important Notes:  debt consolidation may seem like a smart move, but there is potential concern when going in this direction.  If you are already in a financial bind and your credit is on a downward spiral, you will most likely end up getting a consolidation loan with outrageous interest rates.  It may seem simple because you only have one monthly payment, but in the long wrong, you will end up paying more out of pocket.

Debt Counseling
Consumer Credit Counseling Services (CCCS) or Debt Management is when an organization provides professional counseling to a consumer, assisting that consumer in obtaining lower interest rates and finding ways to repay their debt.

Important Note: although debt counseling has much to offer, there are a few hidden down-sides many debt counselors will not divulge.  For instance, once you are set up on a debt counseling program, this is reflected in your credit history.  It is not necessarily a negative reflection on your credit, but if you attempt to open any other line of credit, even a minor store card, you will most likely be refused.  This is because other creditors view this as a consumer’s inability to manage or pay back their debt. 

Many times, there are also hidden fees involved in debt counseling.  They may sometimes ask for a “donation” or add on an additional “fee” the goes directly to the debt counseling organization as a payment for their services.  Also, if you chose to cancel your debt counseling, the lowered interest rates will go right back to where they were prior to the program.

What Does It Mean To Be Sent To Collections?

Once an account is charged-off (typically after 180 days of non-payment), it is reported as a negative mark to the Credit Bureau and sent to a  collections agency (Third Party Agency).  The collections agency will attempt to collect this debt until the account is paid by the consumer or the original lender decides either to take the loss or decides to take further legal action to assure the debt is satisfied.

Common misperceptions:  Bad debt can only continue to be collected on for 7 years.

This statement is incorrect.  According the Statue of Limitations (SOL) for bad debt, there is a limit for which a creditor can file a lawsuit in attempt to satisfy the debt.  The SOL cannot necessarily prevent a creditor from filing a lawsuit once the SOL has expired, but the consumer can have the lawsuit dismissed.

Important Notes:  A collection agency can still attempt to collect on bad debt after the SOL has expired.  The Statute of Limitations is only applied to lawsuits.  Collections letters and collection calls can still be made, forever.  Also, according to the Fair Credit Reporting Act, Out-of-Statute debts can still be reported to the credit bureau, but only for a certain amount of time.