In debt consolidation, you consolidate your debts into one monthly payment, which you make to the debt consolidation firm. After you make enough payments to cover the debt consolidation company’s fees, the company will negotiate with your creditors (usually credit card companies) to accept less than the full amount you owe.
What the debt consolidation company usually does not tell you is this:
- The debt consolidation firm collects its fees first, before making any payments to your creditors. Meanwhile, interest and fees will continue to mount up on your credit card debt.
- Creditors are not required to accept the payment plan. Individual creditors may sue you instead. Once a creditor sues you, the plan is over.
- If a creditor does agree to accept less than the full amount you owe, it will report the canceled debt to the IRS and you will owe taxes on it.