Debt Consolidation

There are actually several different methods that fall under this category. The over all goal is to consolidate all your debt into one payment you can afford. This can be done with a loan, using equity lines, credit counseling or through Bankruptcy. Be very careful with these methods as some will devastate your Credit Rating.

How it works:
1.    Borrowing enough money from a financial institution to pay off all your debts
2.    Borrowing against the equity in your home to pay off all your debts
3.    Credit Counseling Service provided by both for-profit and non-profit companies who negotiate better rates with your lenders and give you one lump sum payment and then they turn around and make the payment on your behalf
4.    Bankruptcy

You will make one payment.
Will pay off the debt in time, but only if you stick with the program.
Creates financial discipline.

Borrowing from a financial institution: You have just swapped one debt for another. If you are not disciplined in your monthly pay back you can find yourself defaulting on your debt consolidation loan. Not to mention most people in financial trouble will be qualify for a loan. You must be current and have relatively good credit. Very few people strapped with debt will fit into this category.

Borrowing from the equity in your home: Again you have just swapped out one debt for another. If it’s a home equity line the payment should be lower. You have swapped all your secure debt out and tied it to your home! What happens if you fall on hard times again and can’t pay your bill on the equity line? You now face the reality of foreclosure of your home. You have basically pledged your home as collateral to pay off your credit cards!

Credit Counseling Service: It should really be called debt repayment program. You will meat with a “credit counselor” who will evaluate your monthly budget and decide what you can afford to pay. The counselor will then contact all your creditors and try and convince them to lower your interest rate, thus your monthly payment. Using this serves you are still liable for the whole amount plus any additional interest or penalties owed. This system is sponsored by the Credit Card industry. which is a red flag in my book. Many Credit Counseling companies are scams and will end up hurting your credit situation and not helping. See why here (Link the IRS settlement case). Also many lenders view credit counseling as an equivalent to bankruptcy. Some have suggested CCS is the equivalent to a collection agency in disguise. Maybe that is why approximately 75% of the people who try this method drop out.

Chapter 13 Bankruptcy
Chapter 13 is a consolidation Bankruptcy. Your debts are consolidated and you are put on a 5 year payment plan. You will pay back most of what you owe and will have your credit trashed. This will stay on your report for the next ten years! This is not a good option for many consumers.

In the past most people opt for Chapter 7 bankruptcy which will wipe out your debts and stop any future collection or wage garnering activities. However this year congress passed a lay making it much more difficult to qualify for Chapter 7 Bankruptcy.