Debt Consolidation - Pros and Cons
Debt Consolidation - Guidelines
Debt Consolidation is always a viable option, but be on guard for scammers who will take advantage of you if you decide to consider this an option.
Debt consolidation is simply taking all your current debt and consolidating them into one loan. Your credit score is not affected going forward because you are not asking for a settlement. You have two basic types of debt consolidation - secure and unsecured.
Secure - debt consolidation of this type requires collateral which in most cases is real property, cars, boats, jewelry, 401k loans; life insurance cash value policies could also be used as collateral for a debt consolidation loan. Maybe unconventional, but still an option.
Unsecured - debt consolidation under these terms require a good credit history, sufficient income and possibly a co-signer. You might be asked to close the accounts that you are consolidating.
The success or failure of either debt consolidation programs is in Discipline. If you start charging again on top of the consolidation loan you will have double trouble. If the new loan is secured by your house your home could be at risk. If you do get approved for a debt consolidation loan, before you sign the papers make sure you understand the risks and temptations that comes with this type of consolidation loan.
Most debt consolidation loans involve taking revolving debt and turning it into a fixed term debt. If your using your home as collateral check with a tax accountant to see if the interest is deductible. This could sway you in deciding which debt consolidation loan to take. Fees should be minimal to none. Most fees are built into interest rates, the exception is usually a loan secured by your home.
In this year, 2008, home prices are dropping. Equity and loans for consolidation may be scarce, but no harm to ask. Also, don't be afraid to negotiate terms with the lender you are consolidating with, a little haggling could save you a lot of money. Donald Trump said: "a good deal is made on the purchase not on the sale" so get all the advantages you can before you sign on the dotted line.
If debt consolidation doesn't work out for you check our Debt Hub for other options. You always want to read the fine print and keep all documentation for any dealings you may enter.
Beware of Debt Consolidation Scams
As with any other crisis you have scammers emerge from the ash, this is no different with debt consolidation. After researching 3 different debt help companies the common elements were:
1. First several payments went to debt company for fees.
2. The debt company kept a percentage of monthly payment.
3. Back end fee - percentage of total debt saved.
When you calculate the total fees, if you completed the program, the example calculation came out to $19K in fees on a 70K balance. Robbery I say and I told the rep this, but he was prepared with script to counter my disgust. Pure and simple, taking advantage of a situation where people couldn't think straight. Now the legitimate debt help companies have these elements:
1. Small up front fee ($100.00 or less).
2. Small percentage take from monthly payment.
3. Talk to you lenders to verify the companies reputation.
Also, be aware that even completing this program with a legitimate debt company won't keep your credit clean.
Make sure all agreements with lender are in writing. The lender is still losing money at the end of the program so make sure "in writing" the lender is going to forgive your debt.
The debt help company is just a middle man and the debt doesn't go away unless you have a written negotiated document from the lender. In reality you can do all this yourself but many people are not in a frame of mind to handle it.
Chapter 7 and 13 are legal avenues which protects you, if approved by the courts. Debt relief is a negotiated settlement between lender and borrower, so if you can't think clearly find someone who can. Keep all documentation.
Debt Consolidation vs Debt Forgiveness
Now you can add a new term to the list of Debt Consolidation, Debt Relief or Debt Settlement, it's Debt Forgiveness.
This normally applies to a home mortgage, but it can fall into the category of Debt Reduction.
These days credit companies know what is happening and are more willing to "negotiate" debt terms, interest rates and balances. Even though the bankruptcy laws changed a few years ago it only affects which chapter you can file, 7 or 13.
Talking to several lawyers revealed that a record number of bankruptcies are being processed during these trying times. That information puts you in a better bargaining position if you wish to "negotiate" your debt.
This opportunity may not have been available if the economy was good. Don't be afraid to try, the worse they can say is no.
I know congress has passed a law for houses, forgiven debt is not taxable, but check to see what it is for credit debt.
Chapter 7 is a total discharge, non taxable event.
Whatever you decide, Consolidate Debt or negotiating your debt, put all terms in writing and document, document, keep documents.