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Consumers Deal With Rising Debt

Mike Sweeney

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Figures from the latest Federal Reserve's Survey of Consumer Finances, one of the most comprehensive assessments of what Americans own and owe, shows the average debt in American households with at least one credit card is growing.

The survey is updated every three years. Although most Americans seem to be avoiding the credit card trap, there are still plenty of people on the financial edge:

-More than a third - 36% - of those who owe more than $10,000 on their cards have household incomes under $50,000.
-13% who owe that much have household incomes under $30,000.
-The percentage of disposable income used to pay debts is still near record highs.
-The median value of total outstanding debt owed by households rose 33.9% between 2001 and 2004.

All of that is enough evidence to suggest that a large number of people are overdosing on debt. So, what can consumers with rising debt do? There are three main strategies: debt consolidation, debt counseling and debt settlement.

Debt Consolidation

Debt consolidation is typically the most desired debt solution. Not only does consolidation get finances back on track to pay down and eventually pay off debts in full without any harm being done to credit history, it very often frees up more discretionary income.

The most preferred method of consolidation is a mortgage refinance. With this, a new primary home loan is taken against the property to “roll in" other debts such as car payments, credit card payments, and so on. As many and as much of these other debts can be rolled in as long as the added principal does not violate the stipulations of the new mortgage loan program. These debts get instantly paid off in full by the new mortgage at the time of closing.

Often times, even though a higher mortgage payment may come with the new loan, monthly debt payments overall are lower and so more money is leftover every month to continue paying down any remaining debt.

Credit ratings get a boost as well by the paying off of those other debts. Debt consolidation also simplifies finances by combining multiple debts into one monthly payment.

Debt Counseling

Debt counseling, which sometimes gets called “debt management", is a second option for regaining control of debts. With counseling, the consumer starts making just one monthly payment on debts to the debt counseling company. Debts aren't consolidated, because the counseling company just takes the payment and then makes the payments to the creditors.

It becomes easier to get a handle on debt since the consumer is held to a strict schedule of payments. This option, however, can have serious negative consequences on credit history. In some cases, it can actually do more harm than good.

Debt Settlement

With debt settlement, the borrower attempts to reduce the total amount of money owed on debts. This is also called debt negotiation or debt arbitration.

Used as a last resort by a consumer who hasn't paid their bills on time and has already destroyed their credit, debt settlement is used to reduce the total amount of “charge offs", or written-off debts that the creditor has written off. The idea being to have some money collected rather than none at all. Pursuing a debtor legally to payback debts can be very expensive and time consuming for lenders.

Lenders’ debt settlement departments negotiate to agree upon a new payment and an ultimately lower payoff amount. Typically settlements range anywhere from 25% to 65% of the original balance. Debt settlement will also have serious negative consequences on credit history.

Mike Sweeney is the founder of, a leading mortgage refinance calculator that focuses on consolidating debt and gives anonymous quotes.


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