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Debt Consolidation Strategy to Prevent Bankruptcy or Foreclosure

Debt consolidation is financial strategy which can be used to reduce outstanding debts. As more people face financial hardships such as foreclosure and bankruptcy, they are turning to debt consolidation programs. The question is, do they really work?

Various types of debt consolidation exist including consolidation loans, home equity loans, home equity line of credit, debt settlement, credit counseling and bankruptcy. It is important to determine which type of consolidation plan is best suited for your situation and understand the risks involved.

Debt consolidation loans are one of the most popular choices. However, caution should be exercised when embarking on this route. Most consolidation loans are home equity loans. Using the equity in your home, a second loan is secured to pay off outstanding credit card debt and unsecured loans.

When unsecured loans are converted to a home equity loan, the terms of the note are extended. The majority of unsecured loans are generally paid over the duration of three to five years, while debt consolidation loans extend payments up to fifteen years. While it may appear to reduce debt, home equity loans can actually create a heavier financial burden. Additionally, they can jeopardize your ability to file bankruptcy at a later date. If you are unable to make your monthly payment, there is the possibility you could lose your home to foreclosure.

Debt settlement is oftentimes used as an alternative to bankruptcy. Depending on the creditor and amount of outstanding debt, you might be able to negotiate debt settlement deals on your own. The process involves contacting the lender and explaining you are encountering financial hardship and considering bankruptcy.

The primary goal is to negotiate with creditors to pay less than is owed. In order to successfully negotiate debt settlement, you need to be prepared to pay a lump sum payment within a specific timeframe. If the creditor is unwilling to negotiate, you may need to hire an attorney or work with a debt settlement company. While you will have the added expense of retaining their services, debt settlement can reduce outstanding debts by as much as 50-percent.

Credit counseling is an affordable alternative that can help you regain control of your finances through education and negotiation of debt. Credit counselors will review your financial situation and make recommendations to help you get back on track. Established credit counseling agencies are usually well-connected within the credit industry and can assist in debt negotiations. Oftentimes, credit counselors can help you obtain lower interest rates, eliminate late fees and negotiate outstanding balances.

Filing personal bankruptcy should be used as a last resort. Personal bankruptcy includes Chapter 7 and Chapter 13. Chapter 7 requires liquidation of all non-exempt assets, while Chapter 13 bankruptcy offers reorganization of debt using a repayment plan. Both bankruptcy chapters require the debtor to obtain credit counseling prior to filing. Filing bankruptcy is exceptionally detrimental to your credit and remains on your credit report for ten years.


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Published on September 05, 2008 at 12:31 PM | Comments: 4

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Comments

Debt consolidation is certainly an option that will help those who are deep in debt. As much as possible bankruptcy should be avoided. Some people question if debt consolidation works. They do if they choose the type that suits them the best. I am glad you have given different options on what types are available.

Evelyn Guzman

Evelyn Guzman | September 6, 2008 3:35 PM

 

It is not hard to have credit cards maxed out before you know it. Soon, though, the bills calling for payment on those things you bought begins to take its toll on your available funds. Before you know it, it may be next to impossible, almost, to catch up on your bills.

Samuel | September 10, 2008 5:23 AM

 

Cheers for writing about this. FYI - I wish there where more companies writing articles and providing useful information to help real people.

matutjie1 | October 25, 2008 2:06 AM

 

I have my house forclosed upon. Should I use debt settlement or debt management better? Since the credit score is very bad already. So debt management won't help much for my credit score?

janice | January 2, 2010 4:51 PM

 

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