Debt Consolidation: A Bankruptcy Alternative

The inability to make payments does not have to end in bankruptcy when you have options such as debt consolidation. Overspending or simply getting behind on payments leaves many individuals and families in a frantic state. A consolidation debt loan or other type of repayment arrangement may be a feasible solution. Debt won't disappear overnight, but the daunting piles of bills and persistent calls from creditors can go away with careful planning and the help of professionals.
 
Avoiding bankruptcy through a debt consolidation plan is a reasonable option for many debtors. It's not always the best choice, however, especially for individuals who cannot control spending. However, for those who are dedicated to changing spending habits, this type of repayment plan is often met with great success and a feeling of accomplishment.

Types of Debt and Repayment Considerations

Many individuals reach a certain level of debt through unsecured loans. These cover a vast list of purchases, unplanned medical care and even everyday living requirements.

Common types of debt include:
  • back taxes
  • credit cards
  • department store cards
  • legal bills
  • medical bills
  • personal loans
  • student loans.

In addition, collection agencies that have taken over defaulted payments may be part of a bad credit debt consolidation plan.

A repayment arrangement can provide several benefits, often allowing you to:

  • avoid bankruptcy
  • eliminate or reduce contact from creditors
  • pay one lower, single monthly payment
  • potentially lower existing amounts owed through negotiation.
Two general types of consolidation plans can help you achieve new financial freedom, a debt consolidation program and debt consolidation loans.

Debt Consolidation Program

Organizations exist that specialize in assisting individuals who are behind in payments. As expert debt consolidators, they will work to combine all your debts into one monthly sum and handle the payment cycles for each creditor. You'll make one monthly payment to them, and they will disburse the monies to each of the companies you owe. Most offer flexibility, allowing you to pay either by check or electronically. Either way, you'll still receive monthly statements at home.
 
The downside to a debt consolidation program is that you'll lose use of existing accounts and may have difficulty obtaining new credit cards when you have paid down all debt. The management fee arrangements with the selected business or organization do not go toward payments.

Debt Consolidation Loans

If you own a home, you may want to consider a debt consolidation loan. Cash-out refinancing and a home equity line of credit are other choices. Drawbacks include the fact that you're taking on more financial responsibility to pay off existing debt. Also, you may feel it's a large risk to collateralize your home, even with lower interest rates.
 
The greatest benefit in seeking a secured debt consolidation loan is it won't affect your credit rating. Even when faced with credit card debt consolidation, this is a possible alternative.

In addition, you might be eligible for an unsecured loan from your bank. Interest rates are higher, but if your credit rating is excellent, it is another consideration. If the interest rate is exceedingly higher on an unsecured loan, you may want to investigate other methods of getting out of debt.

Soliciting Help with Debt Consolidation

Debt consolidation companies and credit counseling centers can provide expert advice when looking for a means of consolidating debt. Representatives can also help negotiate with companies for lower interest rates, waived late-payment fees and even a reduction in the amounts you owe.

Proceed with caution when consulting any organization, either for-profit or nonprofit. While the latter won't charge fees, they generally receive their funding from the companies that you owe. You want them to work in your best interests. A few unethical businesses exist, so it's important to do some research before making a commitment.

Tips for finding a reputable debt consolidation organization include:
  • easy-to-understand contract
  • free initial consultation with in-depth interview
  • good standing with the Better Business Bureau
  • low or no up-front fees.
  • trained and certified professionals on staff.

Putting Together a Debt Consolidation Plan

It's fairly easy to compile a debt consolidation plan. A few simple steps will give you an idea of how much your payment should be:
  • Compile the amounts that you owe. These include credit cards, store cards, vehicle loans and any other debts with the exception of your home mortgage.

  • Make a list of monthly payments from each of the above sources, again with the exception of your home. The total amount is what you will work to lower, whether it's through a loan or a monthly out-of-pocket payment.

  • You can begin comparing loan rates and types, based on the refinancing option you have selected. If you have selected an out-of-pocket program, your adviser will negotiate for a reduced amount from each creditor. Always ask about the built-in and non-negotiable fees, such as membership or set-up costs.

Once you've selected the type of consolidation debt loan or program, you'll know what the monthly payments are and how long it will take to become free of debt. You'll also have reached the most critical point in the process: a determination to clear the debt and not incur more expenses. You may be facing a long road ahead, but with careful management, you can enjoy the benefits of being debt-free.

Resources

Debtexplorer.com (n.d.). Getting a Secured Loan for Debt Consolidation. Retrieved December 20, 2007, from the Debt Explorer Web site: http://www.debtexplorer.com/
Debt_Consolidation_Secured_Loan.html.

Debtguides.org (n.d.). Debt Consolidation. Retrieved December 20, 2007, from the Debt Consolidation Guides Web site: http://www.debtguides.org.

Debthelp.com (2006). Guide to Debt Consolidation, Management, Loans, and More. Retrieved December 20, 2007, from the DebtHelp, Inc. Web site: http://www.debthelp.
com/guides/debt-consolidation.