Can You Consolidate Debt if It Is in Collections?

You hit a bump in the financial road and some of your debt has gone into collections. And the collections agencies won’t stop calling. And calling. And calling.

It’s enough to make you crazy. Are there any solutions other than just paying what you owe as soon as you can?

Turns out, there might be a few options for you to consolidate your debt before paying it off.

Ian Atkins, an analyst and staff writer for Fit Small Business, who has more than nine years’ experience working in personal and small-business finance, says the biggest benefit of debt consolidation is simplifying your debt management.

“You will now have a single payment to make each month and a single balance to keep track of,” Atkins says. “It is much easier to monitor your progress on paying down debt if there’s only one balance to monitor. Think of it this way, a weight-loss program would be much harder to monitor if you didn’t have a scale that gave you an overall weight, but instead made you weigh every body part, one by one.”

Christian Zimmerman, CEO and founder of Qoins, an app that helps you pay off debt with your spare change, says you can consolidate your debt, even after it’s gone to collections, in three ways: Credit counseling, debt settlement or a debt consolidation loan.

Let’s take a look at these three options:

Credit counseling

In this scenario, you repay all of your debt through a debt management plan with payments agreed upon by you and your counselor. Credit counseling is most often done by credit counseling agencies. You sign a contract granting an agency permission to act on your behalf to negotiate with creditors to resolve your debt. Some of the agencies are nonprofits that charge non-fee rates, while others can be for-profit and include high fees.

Companies that offer credit counseling will sometimes offer consolidation programs. Atkins explains that while these companies do not actually consolidate the debt into one loan or refinance the debt to a lower rate, they may offer to manage your debt payments for you.

“Instead of paying all your creditors individually on your own, you’ll develop a plan to pay off creditors with the debt relief organization,” Atkins says. “That plan will often include a single payment you must make to them, which they will then redistribute to your creditors to achieve the goal of eliminating your debt in the most efficient way possible. It’s important to note that you’re paying back 100% of your debt.”

To research the best credit counseling agencies, check out SuperMoney’s comprehensive list

Debt settlement

Zimmerman explains that with debt settlement, you hire a company to come in and negotiate the total amounts owed to each enrolled debt.

“You then stop paying your creditors and instead start making monthly payments to your debt settlement company, usually through a special bank account,” Zimmerman says. “During this time, the debt settlement company will begin negotiating payoff to your enrolled creditors.”

Atkins is wary of debt settlement companies, but if your credit is already broken, you may not have other choices available.

Debt settlement is really only a good option for people who already have credit problems. If you have good credit, there are much better options, such as a debt consolidation loan. But getting a debt consolidation loan is very hard for people with bad credit who don’t have assets. So if you’re at the end of your rope, this might be your best bet.

Debt consolidation loans

If your debt is already in collections, it’s going to be difficult to qualify for any kind of loan that would allow you to consolidate your debt.

Zimmerman says the most common loan you may be able to get in this type of predicament is a cash-out refinance type of loan that works by refinancing your home loan and pulling equity out from your house.

However, while this may be a good short-term solution, it could put your house at risk or underwater, meaning you will now owe more than the house is worth. This is an important factor to consider when deciding whether to refinance your home to pay off debt.

Keeping all of this advice in mind, if your debt is already in collections and you’re having trouble making payments, credit counseling is most likely the best solution to your problem. Or, if you have a lot of equity in your home, you might consider a home equity loan to pay off debt as well.

Just make sure you do your research. Start with SuperMoney’s list of credit counseling companies that may be able to help.

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