I'm often asked if debt cosolidation is a good thing. First of all, debt consolidation involves a whole lot more than simply making a single payment. There are actually two types of debt consolidation: Debt Management Plans (DMP) and Settlement Plans (SP). Which one is best for you depends on your situation.

When we're talking debt consolidation, we're talking unsecured debt only -- any debt that is NOT attached to specific items like credit card debt.

What the Heck Are Debt Management Plans (DMP)?

You use these when you want to completely pay off your debt. You choose a provider (more on that later,) and you make payments to the provider, who in turn pays all your creditors. Generally, after three payments your creditors will make concessions for you, like:

Reduced interest rates
Lower monthly payments
Waive fees, such as late payment fees

Pros Of DMP

A single consolidated payment
Collection agencies stop calling
Your debt is paid in full

Cons Of DMP

Not all creditors will participate
You cannot take on any additional debt while in the program

What the Heck Is Debt Settlement?

This is the option you take when you cannot pay off your debt in full. At some point you have stopped paying your unsecured creditors and you're receiving calls from collection agencies. As with DMP above, you choose a provider (more on that later,) and you make payments to the provider, who in turn pays your creditors. The provider negotiates your payment to the creditors as you're looking to only pay a portion.

Pros Of Debt Settlement

Reduces your total debt
Flexible payment arragements
An alternative to bankruptcy
Usually complete in 3 - 5 years

Cons Of Debt Settlement

Negative impact on your credit
Your debt is not paid in full
Not all creditors are willing to accept pennies on the dollar
Balances will increase with interest and fees during the negotiation period
Calls from collection agencies will not cease; they may in fact increase
You may owe income tax on the amount you don't pay

The Most Important Part: Choosing A Partner

Your Debt Consolidation Provider

This is the most important part of the process. It's no different than hiring a contractor to perform work in your house. Make sure you do your due diligence. Here's what you need to look for:

A good reputation
Referred to you from a trusted source
Offer multiple options for both DMP and Debt Settlement
Resources to help you become more financially literate
Relationships with most creditors

There definitely are some unscrupulous characters out there when it comes to debt consolidation. Do you know of anyone who has tried a debt management plan or even full debt settlement? Let us know in the comments below.

You're Broke, But Is Debt Consolidation For You?