Most of us would do just about anything possible to avoid bankruptcy. If you can avoid the seven years of bad credit from your credit cards and ten years it takes for the bankruptcy itself to come off your record, you should explore your options, right? As long as you are not “too” buried, debt consolidation can help you avoid bankruptcy and get back on track.
What is Debt Consolidation?
Debt consolidation can be a secured loan, such as a second mortgage, or an unsecured loan, to pay off all your existing debt and consolidate it into one easy payment per month. In most cases, a consolidation loan will have far friendlier terms than high-interest credit cards. It makes it easier to manage your debt payments as well as creating some room in your monthly finances.
Debt consolidation is a form of debt management and is offered through both for and not-for-profit organizations. It is not the same as credit counseling, which teaches consumers how to manage their debts on their own. Credit counselors who provide consolidation services may also offer to negotiate your debts, which is a form of debt settlement. Debt settlement is not consolidation and it can have a negative effect on credit, so be wary.
TIP: Whether going it on your own or getting help, beware of bait and switch schemes that claim to charge no fees.
Using a formal program to consolidate debts is not recommended for everyone. Many consumers qualify for consolidation loans without assistance from a bank or another third party. The fine print often reveals many terms and conditions and a minor violation can incur major charges. Consumers must educate themselves and be very cautious when using debt consolidation.
To consolidate with a secured loan, a debtor can refinance the home, get a home equity line of credit, or take out a second mortgage. A car owner can provide the automobile as collateral for a secured auto loan. Retirement funds are used as collateral for 401(K) loans and debtors with cash value life insurance policies may qualify for loans against this coverage. Some firms even loan money against annuities, lottery winnings, and lawsuit claims.
What You Need to Know about Consolidation Loans
Interest is charged on consolidation loans but the rate is typically lower than the rate charged for individual debts such as credit card balances. Consolidation loans tied to a home may also require the payment of points. One point is typically equal to one percent of the amount borrowed. However, points and loan interest may be tax-deductible.
Consolidating debts into a single loan results in one monthly payment. Unsecured consolidation loans typically carry higher interest rates than consolidated versions because property is not used as collateral so lenders take on more risk. With a consolidation loan, debt is repaid in full and there are no negative effects on the credit rating other than those that occurred before debts were consolidated.
Can I avoid bankruptcy if I do not qualify for a debt consolidation loan?
If your debt has already affected your credit report, you may not be able to get a debt consolidation loan, but you still have options. The first of these options would be a debt management plan. There are quite a few companies out there offering this service, but you must do your due diligence because, unfortunately, there are also a lot of scammers in this niche of the industry.
A debt management company will negotiate your debts with the creditors and work out better terms and payments. The benefit to this is that you do not have to pay all of your creditors anymore because the debt management company distributes the funds. All you need to do is make a single payment to the company each month on the agreed date.
Your second option is a debt negotiation. In this case, you can consult with a bankruptcy attorney to see if they offer this service in addition to bankruptcy. The attorney will gather your information and contact each company to negotiate a settlement for the debt. The downside to this is there is no monthly payment, as all balances must be paid in full. In addition, you may take a hit on your credit report. The upside is that in most cases, creditors will settle for a small percentage of the debt just to avoid losing the entire amount in a bankruptcy.
Remember, regardless of your situation, you always have options. If you are still current but struggling to make payments, debt consolidation is a very realistic option. If your credit cards are already late and bankruptcy seems imminent, you can try to work out a debt management plan or debt negotiation prior to filing for bankruptcy.