Debt Consolidation as a Bankruptcy Alternative

If you're thinking about bankruptcy, before you make the final decision to file, you may want to consider your alternatives - one of which is debt consolidation. The basic premise of debt consolidation is to combine all of your debts into one loan.

There are a few advantages to debt consolidation. The first is that is allows you to combine all of your debts into one loan and a singular monthly payment. Instead of dealing with 22 bills from 22 different companies, you are paying one loan with one company. It simplifies the bill paying process and tracking.

Another advantage is that if you can get a decent interest rate for your loan, you can cut the interest rates you are currently paying as a result. For example - if you have five credit cards at 21% interest and you get a loan at 10% interest, the loan would allow you to pay off the credit cards immediately so you wouldn't be paying the 20% interest rate on the cards for the ten years (or however long) it takes you to pay them off. Instead, you'd be paying 10% interest on the balances you racked up on the cards that were paid off with your new loan.

A third advantage is that by consolidating all of your debt into one loan, you now have one creditor. This makes it easier not only for payments and tracking as mentioned above, but also in regards to collection efforts. The loan, as long as you pay it, is a current account. Since the loan would pay off all of your other debts with numerous companies, the collection calls and efforts by these companies would cease.

There are many ways to do debt consolidation. The most common is to take out a home equity loan on your home. This means that you borrow against the equity in your house (the amount you could sell the house for minus the amount you owe in mortgage payments). Since the home will be used as collateral for the loan, you have a better shot at getting a good interest rate.

Be sure to find the best interest rate you can and be absolutely sure you can make the payments on the home equity loan if you don't want your home to end up in the hands of your creditors. Ask for referrals and check out the potential loaner with the BBB before you sign any papers.

Not every debt consolidation loan company truly wants to help you. Some take advantage of the desperation people experience when in financial trouble and use it to charge insanely high interest rates or work clauses into the paperwork that allows them to default on the loan if a single payment is just a week late. Buyer beware.

Another common way that people with smaller amounts of debt handle debt consolidation is to find a single credit card with a great rate and transfer their debts onto it - giving them one bill to pay at a lower interest rate than their current cards or debts. If you choose this option, you'd be wise to cancel the other cards as soon as you pay them off if their open balances will tempt you to spend. Remember, the point is to consolidate and pay off your debt, not consolidate and rack up new ones.

While debt consolidation can seem like an easier and less damaging route to many consumers than filing bankruptcy - as with bankruptcy - it will not fix what got you into the financial strain in the first place. And since debt consolidation will not be a giant blemish on your credit report in many cases, unlike bankruptcy, it doesn't curb your ability to get more credit.

It is also important that you understand the difference between debt consolidation as described here and a debt management plan (DMP) handled by credit counseling organizations. You can find out more about credit counseling and debt management plans here.

If you're not careful, you'll end up right back where you started - only with more debt and less options. It is highly recommended by many experts that those who need debt consolidation seek credit counseling. Credit counselors will help you develop a budget and a plan - and as the name suggests, counsel you on the best way to maintain your credit - and your budget.


Related Articles:

 

+   How you can restore your credit rating after claiming bankruptcy
+   Finding alternatives to claiming chapter 7 or 13 bankruptcy
+   What is involved with filing bankruptcy online
+   Information you need to know about credit counseling