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What Is Debt Consolidation?

By D Frank
Updated May 22, 2024
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Debt consolidation is a debt reduction system that allows consumers to combine their assorted unsecured debts into one payment. Instead of sending out payments on six or seven bank and store credit cards, for instance, you would make one payment to the debt consolidation company and that company would then disperse the funds for you.

This money management system can be extremely advantageous to the consumer as the debt consolidation company will generally negotiate a reduced interest rate, a reduced balance, a lower monthly payment, eliminate late fees, and set a term when the debt will be paid off in full. This may save the consumer large sums of money in the long run. A financial management system like this is far superior to paying the minimums on a credit card every month and watching as the balance continues to grow through the years. Mortgage loans and car loans are not subject to consolidation as these loans are secured. Unsecured loans like bank credit cards affiliated with Visa and MasterCard, and assorted department store credit cards (Marshall Field, Dayton's, Lord & Taylor, etc,) are typically the items put into a debt consolidation program.

Debt Consolidation

Creditors view debt consolidation positively since the consumer is showing a strong, good faith effort to take responsibility for and pay his or her debt. Creditors much prefer debt consolidation over a bankruptcy as debtors can completely erase their debt in a Chapter 7 Bankruptcy, or pay, for example, 10 cents on the dollar in a Chapter 13 bankruptcy. In either case, the bankruptcy creditors are left with little or nothing from the debtor. While a bankruptcy allows consumers to wipe out their debt and start fresh, it also tends to destroy a consumers credit background. After a bankruptcy, a creditor will have difficulty establishing credit for almost seven years.

With a debt consolidation, on the other hand, a consumer can greatly reduce his or her debt, combine multiple payments into one payment, and preserve their credit background by avoiding bankruptcy. There are debt consolidation companies in almost every city and town in the United States. The Internet also lists such companies that are willing to help consumers begin to eliminate their debt.

SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
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