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

One option you can consider is debt consolidation for collections.

The biggest benefit of debt consolidation for collections in these cases is that it simplifies your debt management. Instead of multiple creditors, you will now have a single payment to make each month and a single balance to keep track of. It is much easier to monitor your progress on paying down debt if there’s only one balance to monitor.

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:

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 debt consolidation for collection programs. While credit counseling agencies 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. That plan will often include a single payment you must make to them. The agency 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 will be paying back 100% of your debt.

If you choose debt settlement, you will need to 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. During this time, the debt settlement company will begin negotiating payoff to your enrolled creditors.

This will damage your credit, 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 for collections 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.

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.

The most common loan you may be able to get in this type of predicament is a cash-out refinance. This 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.

If your debt is already in collections and you’re having trouble making payments, credit counseling or debt settlement are most likely to be the best options. If you don’t have the income and assets to cover your current debt a debt consolidation loan for collections may only make things worse. However, if you have equity in your home and you could realistically afford the monthly payments, you might consider a home equity loan. Just remember you are putting your home at risk if you fail to make payments.

Read this guide for more detailed advice on how to get out of debt.