Debt Consolidation: Is it the debt relief plan to get out of debt?
Debt consolidation is a technique used to help individuals regain control of their finances and become debt-free. Today, millions of Americans are in serious financial trouble. They are faced with foreclosure, forced into bankruptcy, and losing everything they have worked for their entire life. Many are turning to personal debt programs and financial advisors in hope of rebuilding their future.
There are several different types of debt consolidation including consolidation loans, debt settlement, credit counseling, bankruptcy and good old fashioned take-charge-of-your-own-finances. While the later requires willpower and investment of time, there is no reason to spend more money in attempt to get out of debt
While debt consolidation companies offer the promise of a brighter financial future, many can further exacerbate the problem. Considerable caution should be used when signing up for debt relief consolidation. At minimum, check with the Better Business Bureau to see if the debt consolidation service is in good standing.
It is important to determine which type of debt consolidation plan is best suited for you and understand the risks involved. Although consolidation loans are one of the more popular choices, they can jeopardize your ability to file bankruptcy and leave your home vulnerable to foreclosure.
The majority of debt consolidation loans are actually home equity loans. This type of financing carries significant risk and hefty fees. Consolidation loans payoff the debtor's outstanding credit card balances, personal and student loans, and various types of unsecured debt. Instead of paying monthly payments to several creditors, debtor's pays one large monthly payment to the debt consolidation lender.
While it may appear to reduce debt, unsecured loans converted to an equity loan can create a heavier financial burden. First and foremost, the equity in your home is depleted to repay unsecured loans. By refinancing debts and rolling them into one loan, repayment terms are extended, increasing the amount of time required to pay off debts. Additionally, equity loans are secured by your home. If you are unable to make your payments, you could potentially lose your home.
Debt settlement is sometimes used as an alternative to filing bankruptcy. In many instances, debt settlement can be negotiated by the debtor. In other instances, debtors will require the assistance of an attorney. The objective is to negotiate with creditors to pay less than is owed. Similar to real estate short sales, debt settlement requires the debtor to be prepared to pay a lump sum payment within a specified timeframe. Also known as debt negotiation or debt arbitration, debt settlement can reduce outstanding debt balances by as much as 50-percent.
Credit counseling can help debtors get a better grasp on their finances through education and negotiation of debt. Credit counselors assess the debtor's financial status, make recommendations and assist in negotiations with creditors. Reputable credit counseling agencies are well-connected to the credit industry and can help debtor's obtain lower interest rates, eliminate late fees, negotiate balances and re-age past due accounts to current status to improve the debtor's credit rating.
There are two types of credit counseling organizations – non-profit and for-profit. Non-profit debt relief agencies base fees according to a sliding scale factor. In essence, the debtor is required to pay a certain amount based on their income. For-profit credit counseling companies typically charge a start-up fee and a monthly fee payable until debts are paid in full.
Bankruptcy should be considered as a last resort. There are two types of personal bankruptcy – Chapter 7 (liquidation) and Chapter 13 (repayment). Certain requirements must be met before debtor's can file. Both bankruptcy chapters are detrimental to credit and remain on credit reports for up to ten years.
Debt consolidation can be accomplished through your own personal effort. The Internet provides a wealth of information on becoming debt-free. There are a myriad of forms, creditor negotiation letters and articles available online for free. While it takes time, patience and most important, a get-out-of-debt plan, anyone who truly has the desire to eliminate debt can do so.
Take time to become educated about your finances. Sit down and make a list of your income, expenses and outstanding debts. Talk to a credit counselor or financial advisor. Conduct research online or visit your local library for debt management books. Then, create a plan to help determine which type of debt consolidation plan will help you achieve financial freedom.