What is the difference between debt consolidation and debt mediation?

Many people faced with the daunting task of eliminating their credit card and medical bill debt are confused by the different available options. Here are brief explanations of your options and the different ways they will impact your life.

1. Debt mediation:
The term debt mediation refers to the process of negotiating with your creditors to reach a settlement in which you pay less than the total amount of your debt. Also known as a debt reduction or debt elimination, the process is in place to try and negotiate your debt down to 40-60% of its total. This process is primarily used by people who are struggling financially but still have an income and are able to make monthly payments.

It is possible to reach out directly to your creditors and attempt to negotiate on your own behalf but most people have much more success going through a debt mediation agency. The agency will work with you and the creditor to negotiate a lower debt amount often resulting in very large savings.

The way this process works is straight forward. The client chooses to stop making their monthly payments towards their credit card balance and instead put money aside in a trust account. Each month, as those accounts begin to grow, your debt mediation agency will keep track of your balance and begin negotiations with your creditors once the balance has matured to a viable number. As soon as the balance of the trust account is large enough, your agency will negotiate with your creditors and start eliminating your debts one by one. The process can take anywhere from 12-48 months depending on the debt amounts and the size of the monthly payments.

You may see a decrease in your credit score when you stop making the credit card payments but once your accounts are settled your score will improve dramatically. Upon completion of your program, there should be no reference to any third party assist on your credit score further improving your score.

2. Debt Consolidation:
Credit consolidation is a form of debt refinancing where you take out a single loan to pay back all your debts at one time. Ideally, this process is done with a loan that has a more favorable interest rate or monthly payment to your current situation.

There are a couple ways you can bundle your debts into one lump sum payments. The first is to consolidate all your debt onto one credit card. Ideally, it should be a card with little to no interest. Another option is to consolidate with home equity loans as the interest on those loans are deductible for those who itemize.

While this method will eliminate your debt in one sweep, it will keep you in debt to your lender until that payment is paid off.

If you are looking for assistance with eliminating your unsecured debts, call GRT Financial at 800-811-5721.

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