Monday, May 25, 2009

Bankruptcy and Debt Consolidation

There are lots of sites online offering all kinds of debt solutions. More of them call themselves debt consolidation, but that term is used so generally it sounds like it could mean almost anything. Perhaps you don't care about terminology. After all, a debt program that works is all that matters, right? If you are in debt, you can get that one of your problems right now is not so much lack of information as it is too much information!

The truth is that you need to know all about these

things in order to select the right choice for your situation. Pick the wrong one can cost you're money, damage your credit, and keep you stuck in debt. Pick the right one can get you out of debt.

Get start with the one not on the list: bankruptcy. Believe it or not, Americans have a Constitutional right to go bankrupt.

You can declare bankruptcy in the U.S. without getting a lawyer and judge involved. Bankruptcy is a legal proceeding. The proceeding becomes part of public record. Bankruptcy is highly intrusive in that outsiders will now determine how your money will be divided up to pay off debt and what you must sell.

Bankruptcy offers an advantage many debitors really love. A court has the power to issue "bankruptcy protection." You may be allowed to write off certain debts. That means some debts just go away; you are no longer obligated to pay them. Moreover, once you have "bankruptcy protection," bill collectors can no longer pursue you for those debts.

The problem with bankruptcy is that it all but ruins your credit. It stays on your credit report for seven years, and it has a way of cropping up even after that. It makes it very tough to get new loans or buy a house. The loans you will be able to get will be at very high rates of interest since you've suddenly become a high-risk borrower.

Bankruptcy will turn your life upside down. If you have secured loans (like car notes or loans to buy electronic equipment), those things can be repossessed. The court may seize or order you to sell certain assets and take the money to pay off other debts. Another requirement is taking care money management classes, kind of like being forced to go to debtors' rehab.

While bankruptcy does have its place, it is definitely the last choice

Debt settlement and debt negotiation mean roughly the same thing: you or somebody representing you sits down and talks to your creditors to work out a solution.

The rule is that you work out (negotiate) a way to end (settle) your debt. You may be able to get the interest rate reduced or the terms of payment changed (such as getting a couple of months off or extending the terms of the loan). Sometimes you negotiate to try to get the balance reduced. As an example, assume you owe $10,000. You would negotiate with your creditor to try to get him to accept less, say $5,000, and mark the debt paid in full.

Why would anyone act that? The main reason a creditor will negotiate a debt is that they suspect you are flirting with bankruptcy and they are fearful that if you go bankrupt, they won't get anything. From their viewpoint, $5,000 may be better than nothing.

Debt settlement and negotiation plans will almost assuredly make it all but impossible to get future loans at reasonable interest (if at all).

A debt management plan (DMP) is a formal plan where you hand your problem off to a company which then negotiates your debt. You make one monthly payment to the DMP and they handle your problem.

Although there are legitimate DMP programs out there, these are very treacherous waters. Do your homework and check with the Better Business Bureau as well as a certified credit counselor ( and maybe your bank or credit union. There are programs out there that are outright frauds and a few that are not dishonest but not exactly advantageous to the customer.

The last access is something called debt consolidation. Ironically, many debt settlement, debt management plans, and debt negotiation companies will call their programs "debt consolidation." That is not inaccurate, but it's a bit misleading.

Debt consolidation simply means lumping all your debts together. In one way, that is what all debt plans do at first, whether it's bankruptcy, a DMP, or some other program.

But pure debt consolidation involves lumping your debts together and then taking out one big loan to pay them off.

Why would anyone do that?

If you have a lot of high-interest loans, you may be able to take out lower-interest loans to pay them off. For instance, if you owe $10,000 at 22% on a credit card and you can borrow $10,000 at 10% from your bank, you would be smart to borrow $10,000 at 10% and pay off the credit card. You still owe $10,000, but you owe it at less than half the interest rate. If you keep making the same payments, you'll pay the debt off much sooner.
If you own a house and can refinance it or get a home equity loan or second mortgage, you can use that to consolidate your debt. Let's say all of your debts together came to $100,000 and you owed them at varying interest rates from 22% down to 10%. If you own a house and take out a second mortgage (or use another refinancing option), you can borrow $100,000 and pay off all of your debt. You can structure this second mortgage as a 30-year loan and probably get it at 7% or even lower. The result is a significantly lowered monthly payment and a carload of individual loans you can stamp "paid in full".

Debt consolidation offers a lot of advantages. (That's why so many programs like to call themselves debt consolidation!)

It is the only debt solution that can actually help your credit score (your credit score goes up whenever you pay off loans in full). If you are willing to take the time to learn a few things, you can do it yourself (no fees or other people to pay). It's not intrusive; in fact, if done properly, no one would ever guess you did it. Even if your bank or a loaner figured it out they would probably think you're smart to handle your debt that way.

If you can figure out how to do a pure debt consolidation on your own, you don't need to bother with hiring a company (or a lawyer), entering financial rehab, or paying off agents to "manage" your money.

In the interest of fair revelation, however, it must be stated that debt consolidation in its pure form will not work for everyone. Some people will not qualify for it. There are others who might indeed qualify for debt consolidation articles Submission, but will find another plan is more to their advantage. It's important to learn what you can to find out if debt consolidation is suitable for you.

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