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Debt relief 101: Understanding your options and avoiding the scams

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The total consumer debt in the United States has ballooned to over two trillion dollars a full 100% greater
than it was just a decade ago. As a result more people than are in need of debt relief services.

Bankruptcy Law,debt relief,loan

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The total consumer debt in the United States has ballooned to over two trillion dollars a full 100% greater
than it was just a decade ago. As a result more people than are in need of debt relief services. But like with
all burgeoning industries, there are a number of scams and ineffectiveness in many debt relief services. As a
result, it is important that consumers considering debt relief know their options.

Debt Consolidation

The most well-known form of debt relief is debt consolidation. The principle behind debt consolidation is
that by combining the many small debts, many of which are very high interest such as credit cards, under a
single lower interest loan, you can get control of your debt. Under the single lower interest loan, the overall
cost of servicing the debt, that is your total monthly payment, is lower than the combined total of the many
smaller debts. That at least is the theory behind all debt consolidation programs.

Many programs go further, however, by limiting your discretionary spending. The theory goes, that because
you have accumulated so much debt through your own uncontrolled spending, the debt consolidation lender
will in effect act as your accountant too. The limitations placed on you by debt relief programs range from
prohibiting major purchases like as a new car or home, all the way to those organizations which take your
paycheck before you get it, and then dole out to you the remainder. While the latter version sounds
intrusive, and certainly it is, it may prove for some individuals the best option as it will force a rationing of
discretionary spending. But one thing you can count on with almost every debt consolidation program is the
requirement that you cut up all of your credit cards. As credit is the number one contributor to consumer
debt today, that isn’t all that bad of an idea.

Creditor Negotiations
But debt consolidation isn’t the only option available to those in debt crisis. Another option is to hire a
creditor negotiator. These services, usually under the name debt management or debt managers, mediate
negotiations between you and your creditors in the hope of lowering your total debt. In effect, these
individuals bargain with your creditors, threatening them with the possibility of you seeking bankruptcy (in
which case they get almost nothing) to try to get them to lower the interest rate, or the principle of your debt.
This can be a very effective method for those unable or hesitant to secure a new larger debt through a debt
consolidation loan.

The problem with both of these options is that they do not come for free. While many organizations present
themselves as non-profit or even public servants, the reality is that almost every agency is in business
because of the profits they can make off of you. For example, many individuals in need of debt
consolidation are so thankful to find a willing lender that promises to lower their monthly payment, that they
fail to examine closely the loan contract they are offered.

The Negatives and Scams of Debt Relief Programs

A common scam is to hide huge “service fees” or “debt consolidation fees” in the principle of the loan. So,
if for example you have $50,000 in outstanding debt, your debt consolidation lender may provide you with a
loan as high as $80,000, where the extra $30,000 is comprised almost entirely of fees. The lender then
extends the loan out for years and years, so that your monthly payment is actually lower and as a result you
do not ask any questions. Another, even more devious scam is to vary the interest rate over the life of the
debt consolidation loan. For example, the lender might offer you a loan in which for the first two years the
interest rate is an extremely low percentage, say 4%. But very quickly, the interest rate balloons to
something like 15% at which point you will no longer be able to make payments and must go back to the
lender and “consolidate your debt” once again.

But debt consolidation lenders are not the only one’s trying to scam you. Creditor negotiators seem to offer
a problem-free solution to your debt troubles. They offer to negotiate with your creditors, making the
process seem infinitely more complex than it actually is. In truth, many individuals can simply negotiate
with creditors themselves. The threat of bankruptcy is very real for many lenders, and as a result many are
willing to offer you alternatives to the current high interest rates they are charging you. By cutting out the
middle man credit negotiator, you can save much by way of charges, for the rather minimal hassle of calling
the creditors yourself.

Both debt consolidation and debt management services fill important niches in a world where consumer debt
is increasingly prevalent. It is important to remember, however, that these companies make money off of
you. And because the industry is in a stage of rapid growth there are a great number of companies working
on the edges of the law if not engaging in outright predatory lending. By entering the world of debt relief
you are entering the world of scam artists and sub-prime lenders. Educating yourself before you enter the
arena is the only way to ensure that you attain the best debt relief for you.
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