Sense & Centsibility Blog
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Understand types of debt and learn options to eliminate it

Living with debt can be a challenge. Finding effective options to lower your debt payments and interest rates will help you pay off debt faster so you can start to breathe a little easier.

One of those options is debt consolidation. The classic definition of debt consolidation is the act of paying off multiple debts with one loan. However, there are other ways to get one monthly payment on multiple debts without taking out a new loan. This blog post will focus on sorting out your debt to determine the best ways to handle each type and two alternatives to debt consolidation for unsecured debts, such as credit card debt. In a future blog, I will go through various options of debt consolidation, including the pros and cons of each.

Debts and expenses that take priority

Regardless which strategy you decide on to manage your debt, remember that not all debt and expenses are created equal. It’s important to pay debts and bills that are tied to your survival first:

  • Pay the mortgage/rent, utilities, car loan, car/home/health insurance premiums.
  • Feed yourself and your family.
  • Put a little money aside each month into emergency savings so you do not have to take on more debt when unexpected but necessary expenses arise.
  • Never skip paying rent or your mortgage to pay a debt like a credit card bill. While you can’t ignore those debts, you need to ensure that you first have a roof over your head before making a credit card payment.

Next, take a good look at your debt, and decide how to deal with each type. If you are on a limited income and there is no money left over after paying the bills and expenses in this survival category, then you need to stay in survival mode. Continue to pay priority expenses before paying off other debt.

Some types of debt should not be consolidated

Medical debt should stay as medical debt and not be consolidated. It doesn’t accrue interest, so do not pay it off with a debt consolidation loan, no matter how much pressure you are feeling from stacks of medical bills and phone calls demanding that you pay NOW. Work with your clinic, financial assistance and/or insurance carrier to reduce the debt and/or set up a payment plan. Read our blog to learn more about medical debt.

Student loan debt should stay as student loan debt, too. We have certified student loan counselors to help you navigate this type of debt, discuss options to make student loans more affordable, and explore your eligibility for loan forgiveness.

If you have predatory loans (e.g., payday loans, high interest internet loans, title loans, tribal loans and/or pawn loans), we can work with you to find alternatives to debt consolidation. If you are a Minnesota resident and your loan balance is $1,500 or less, you might qualify for a 0%/$0 fee repayment plan with Exodus Lending, one of our trusted partners. If the predatory loan is not following state guidelines, contact the Minnesota Attorney General’s office for assistance.

Unpaid taxes are state or federal debt that are not reported on your credit report. If you took out a debt consolidation loan to pay these, the loan would be added to your credit report, potentially lowering your credit score significantly. For federal tax issues, you can contact the IRS Taxpayer Advocate Service, or you can work out a payment plan.

Beware of debt negotiating/settlement companies

When searching online under “debt consolidation” or “debt management plans,” there are many companies that show up in the results; therefore, you need to be cautious and do research before signing up for anything. Many really are NOT organizations that offer debt consolidation or debt management plans, which can be confusing. Sometimes people are referred to these companies as an option if they do not credit qualify for a consolidation loan, which is also confusing. You might be thinking you are making payments on a consolidation loan, but you are not.

What these companies offer is typically NOT debt consolidation; it is debt settlement. Debt settlement companies encourage you to not communicate with your creditors and to stop paying them. The consequence is that your credit score plummets, and you are then prone to judgments against you or being sued for that debt. Once enough payments are collected from you to the debt settlement agency, the company will work on your behalf to offer your debtors a lump sum payment (of your money) to pay off the debt balance for less.

Debt settlement is a perfectly legal and acceptable way to handle debt. What you need to know, however, is that you can do this for free on your own without paying a debt negotiating agency to do it for you. Here are some pros and cons to consider:


  • If you understand the risks of debt settlement up front and you just don’t want to negotiate the settlements on your own, you can pay a company to do that for you. (But again, you can do this on your own with support from a non-profit credit counseling organization for free.)


  • The process can be very costly and could take years before they reach a settlement — and there is no guarantee that they will reach one.
  • When you make payments to the debt settlement company, it is not paying your creditors on your behalf. It is holding that money in an account until it reaches a settlement, then uses that money to pay the creditors.
  • Your credit score will decrease dramatically because you are not making regular payments on your debt.
  • You can still receive collection notices and collection calls.
  • You can be sued for the debt and have your wages and bank accounts garnished.
  • The unpaid amount of debt will be included in a 1099-C sent to you, which has tax implications at tax filing time.

Another option: Debt Management Plans

A Debt Management Plan (DMP) administered by a National Foundation for Credit Counseling certified nonprofit agency, such as LSS Financial Counseling, is an additional safe option to repay your debt in full. It is different than debt consolidation. A DMP takes your unsecured debt (most credit card debt) and combines the payments into one monthly payment, which you would make payable to LSS. We then disburse money to each of your creditors on your behalf. You do not need to credit qualify, as a DMP is not a loan, but a financial counselor does need to review a budget with you to make sure you can afford it. A DMP can shave many years off the repayment period and could save you thousands of dollars in interest charges. Here are some pros and cons to think about:


  • Creditors will reduce their interest rates on your credit cards — in some cases, as low as 0%.
  • Your unsecured/credit card debt will be paid off in five years or less.
  • You will have just one monthly payment, not several. You have multiple due dates to choose from for your monthly payment.
  • As mentioned above, you can qualify for a DMP regardless of what your credit score is.
  • Over time, your credit score increases when you make on-time payments.
  • The debt under a DMP is not tied to any collateral, so there is no risk of losing your home or car if you miss your payments.
  • Reviewing your budget with a certified financial counselor is free.
  • There are no prepayment penalties if you decide to pay off the debt sooner.


  • Most, but not all, creditors participate in the plan. (Talk with your financial counselor to determine if you have any creditors that do not work with DMPs.)
  • The credit cards on the plan will need to be closed. You will not be able to use those cards, and initially your credit score might drop.
  • There is a one-time set-up fee and a small monthly service fee. Despite the small monthly service fee, the monthly payment (including the fee) is usually lower than what you are paying now.

Having a clear picture of how you’ll pay off your debt takes some strategizing. Our trusted, certified, nonjudgmental counselors are here to talk with you and create an individualized plan to manage whatever type of debt you may have. Call 888.577.2227 to set up a free, confidential counseling session.  

You are not alone. Taking control of your financial life is worth it!

Sarah Jannusch


Author Sarah Jannusch is a Certified Financial Counselor with LSS Financial Counseling.