New York City
With so many people over their heads in debt, there are a lot of companies that offer debt consolidation loans. Unfortunately, this method of getting rid of your debt just allows you to take out another loan. While these loans might have lower payments than what you're paying now, they typically result in you paying more in interest and other fees over the life of the loan than what you would otherwise pay.
Another way to consolidate debt is to negotiate on your own with individual creditors. Sometimes, banks will agree to lower an interest rate or decrease the required monthly payment on a loan. However, after getting the bank to agree to a decrease like this, a person has to make sure that they are able to meet their debt obligations. Any mistake can cause a bank to demand the note be paid in full immediately.
Strategic default is a way to consolidate debt that carries a lot of risk. Under this method, a person picks one or more debts that they will no longer make payments on. After several months, the creditor is usually willing to negotiate a settlement or at the very least better payoff terms. At this point, the borrower agrees to pay a lump sum of money to pay off the debt. They make sure that this lump sum is significantly less than what they otherwise would have paid.
Of course, this method can be very risky. Many lenders will sell the debt to a collection agency who will then add a lot of fees to the debt. Some of these collections agencies will refuse to negotiate. Furthermore, this method can do a lot of damage to a credit score. The missed payments can deduct between 10 to 50 points apiece, and having an account sent to collections is not viewed favorably at all.
While it is not strictly a form of debt consolidation, debt settlement is a popular option for some. Through this process, a professional negotiator will review your debts. They will work with your creditors to negotiate a reduction in the amount that you owe. Depending on the type of debt, a creditor may reduce the amount you owe by thousands of dollars.