Debt consolidation and bankruptcy are two options available for those who are deeply in debt.  However, is one option better than the other?  Which option is right for you?

Debt Consolidation

Debt consolidation is a tactic where a debtor takes out one loan in order to pay off many other smaller loans. This might be a good option and there are some very good reasons for doing this.

• Lower Interest Rate

It is possible to secure a new loan with a lower interest rate. This could save money on interest payments.

• Lower monthly payments

With a lower interest rate, it is possible to lower the total required monthly loan payment.

• Pay down the debt faster

With a lower monthly payment, the money saved could be used to pay down the                  debt earlier.

• Save on late fees

Since only one check is written each month instead of many, it is possible to manage your money better.  The chances of forgetting to mail bills are less and there will be smaller chance of being subjected to expensive late fees.

While there are many benefits associated with debt consolidation, there are also some downfalls attached to it also.

• The loan may require collateral

In order to secure the loan, something of value may be required in order to obtain it.  If this is a house, this may make it more difficult if you plan to sell.

• Debt consolidation loans may be difficult to get approved

If your debt is high, and it probably is, along with a marginal credit score, it may be hard to get your loan approved.

• There may be a fee included in the consolidation loan

This may not be a free pass and many companies may build a costly fee into the loan.

Bankruptcy

There are many negative connotations associated with declaring bankruptcy but, for someone who is hopelessly in debt; this may be their only option.  What can bankruptcy do for you?

• It eliminates debt

By filing for bankruptcy, either Chapter 7 or 13, most debts will be eliminated.

• Creditors will stop calling

By law, creditors must stop all collection activities against a debtor once bankruptcy has been filed.

Bankruptcy may look attractive on the surface but, before following through, it is wise to look at the disadvantages that are involved.

• It affects your credit rating

Since a bankruptcy remains on your credit report for ten years, it will have an adverse affect on your credit rating.

• Acquiring new credit may be difficult

Depending on the lender, acquiring credit after a bankruptcy may not be easy.

Where to Turn

Since each financial situation is different, it is necessary to analyze each situation separately.  Locate a credible, experienced, and competent credit counselor to help you. They will be unbiased and will offer you an objective opinion. Credit advisors will also be able to offer advice on both debt consolidation and bankruptcy but, ultimately, the decision is yours to make.

The important thing here to remember is to not give up and to be proactive.  Work to resolve your financial troubles because there are options available that can help you.

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Debt consolidation can be helpful to assist in sorting out your debts. It can be too easy to make a late payment in a given year if you are trying to keep track of when each of your various six payments are due each month, and even one late payment can have negative side effects on that specific loan and your overall credit record. Of course, there is a lot more to debt consolidation than only keeping track of one payment.

What To Watch Out For

Before you consolidate your loan, it is important to know that the debt consolidation firms are out there to make a profit. You cannot just go and consolidate your loan without an extra cost. Some of the things that debt consolidation firms use to make their profit includes:

• Increasing The Payment Period: While the consolidation may offer you a smaller monthly payment than what you currently pay, they normally can only do this by extending your payment period. This means that you will stay in debt longer, and pay more in interest over the long term. A smaller payment may sound like a great benefit, but be sure you examine how much longer you would be in debt, and how much more you would be paying in interest.
• Increasing The Interest Rate: Consolidation firms sometimes will charge a interest rate higher than the weighted average rate of your other loans. However, they often disguise this by combining it with the first strategy. This way, the consolidation firm can charge you a higher interest rate for a longer period of time, and still offer “one low monthly payment.”
• Miscellaneous Fees: In order to process your loan application and get everything arranged, you will most likely encounter “application fees” and “administration fees”. Each one may not seem like much money at the time, but they can quickly increase your bill, making the consolidation plan much less attractive.

The FIDO website also has some great tips on what to watch out for when consolidating your debts.

Is It Right For Me?

The benefits to debt consolidation will vary depending on your personal situation. If you are relatively well off financially and can make your current payments, then debt consolidation probably isn’t for you. Conversely, if you are on the edge of financial ruin, a debt consolidation loan may be the only way to keep yourself out of bankruptcy. Before making the decision yourself, take some time to meet with a financial counsellor to discuss your needs and financial situation.

By taking time to meet with a local financial counsellor and exploring the added costs of debt consolidation (live longer in debt, pay more in interest), you can determine whether or not debt consolidation is right for you.

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* “Debt relief is just a phone call away!”

* “Stop paying your debts today!”

* “Erase your high interest rate! Call now”

Every year, millions are lured in with high hopes. And it’s easy to understand why.

With so many individuals now carrying high credit card balances, never before has the prospect of credit card consolidation appeared more appealing. Yet, despite the glorified status lenders have bestowed up them, credit card consolidations can quickly turn a financial problem into an irrevocable financial crisis.

The promised “quick fix” of debt consolidation is powerfully tempting. But the slippery slope of consolidation loans can introduce a variety of other threats to one’s fiscal health.

Among the gravest dangers:

Small Fees Become Big Expenses

Consolidating debt isn’t free. And the costs (hidden or straightforward) can be significant. Securing a new loan or consolidating old ones may not only incur administrative and processing fees, you may also be penalized for paying off your balance early (assuming, of course, that you could). Even worse, consolidation loans are frequently secured against one’s home, which subsequently leads to legal fees and a host of other ancillary expenses. There is no shortage of “small fees.” When totaled, it’s a heavy price tag for credit card consolidation.

The Balance Transfer Catch

Balance-transfer opportunities are a dime a dozen. And although they work for the short term, zero or low rates only last for a limited period of time. If you think you can repay the full balance during that time but ultimately can’t, you may soon end up paying a higher rate on your outstanding debt than you were before the consolidation.

Stranger Danger with Debt

As children, we were frequently told never to talk to strangers. Some credit lenders should have been included in those maternal warnings. Because numerous debt consolidation providers make substantial commission on balance transfers and loan consolidations, there is no shortage of misleading advocates for consolidation trying to squeeze even more money from your pockets.

The Risk Factor

Taking out consolidation loans or having to switch balances back and forth leaves a blemish on your financial history. After a substantial amount of this sort of activity is recorded, it will portray your financial responsibility in a negative light and leave you a “high-risk” candidate for financial products and services in the future.

Does Credit Card Consolidation Make Sense For You?

It depends.

If anything is easier to get into than debt, it’s more debt. And, without exception, this is ironically the gravest danger posed by credit card debt consolidation.

Unlike a debt consolidation loan, which is typically secured debt, credit card debt itself is unsecured debt. Once your present balances are consolidated through a loan or multiple balance transfers, your remaining credit cards return to having a zero balance with ready access.

If that zero figure remains unchanged throughout your entire repayment process on consolidated debt, it might be in your best interest to seek a credit card consolidation opportunity. If, however, you have any inclination that you will soon max-out your credit cards again and abuse your consolidation process as a renewed license to spend, avoid this financial alternative at all costs.

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First, Count Up Your Total Indebtedness and Monthly Income

If you do not already know how much indebtedness you have, not counting your mortgage, then you need to sit down and total up all your debt. In addition, you need to find out how much total income you have – after taxes. This will show you what kind of money you have each month once you subtract monthly bills from monthly income. If your income is less than your monthly debts, then you will need to act quickly to make some immediate changes.

This prospect might seem a little daunting, but it’s really not all that difficult. You can do it old-school, with pen and paper, but I prefer the mod cons, so I use a budget planner spreadsheet. Get a ready made one here, as well as instructions on how to get it working (it’s an American site, but the info is good for Aussies too).

Consider Your Debt Reduction Options

If you have a lot of credit card debt, and not other kinds, then you may be able to obtain a new balance transfer credit card. This kind of credit card is valuable to you if:

• You do not put new charges on the old cards
• You are able to transfer debt without charges – or minimal charges
• You will reduce your charges as fast as possible while you have 0% interest.

Consider a Debt Loan

Taking out a debt consolidation loan to pay off your other loans can be a very good idea, although it will not work to everyone’s benefit. It will help you if:

• Your current loans have high rates of interest.
• You can get a lower interest rate and longer terms.
• You have an income that will enable you to meet payments comfortably.

In order to be considered for a debt consolidation loan, you will find that a lender will more readily work with you if you have some assets – a secured loan. Secured loans are obtained more readily because there is some collateral behind it. Don’t forget about the possibility of refinancing your loan, too.

Let Debt Consolidation Work for Your Lasting Good

Getting a new loan for debt consolidation will work best for you if you will work to pay it off as quickly as possible. Doing so will help raise your credit score if it has been hurt because of the debt and missed payments. Ideally, you would want to get a debt consolidation loan before that happens.

You want to avoid letting this new loan take its full course. It is to your advantage to pay it off quickly in order to avoid as much interest as possible. This will enable you to get out of debt quicker and enjoy the freedom of being debt free again. Debt consolidation loans work best if the end result you seek is total debt elimination. Anything less should not be looked at as a lasting solution.

Talk to Debt Counselors

Most people probably do not need to talk to debt counselors, but in some cases it will be necessary. This may be an especially good idea if:

• Your debt exceeds your income
• You have no idea what to do
• You do not handle money well
• You are considering declaring bankruptcy.

You can get the help with your debt that you need. The first step is to see where you can comfortably reduce your monthly expenses and put that money toward your existing debt. Oftentimes, with good money management and a tightening of the belt, you may be able to slim down your budget and eliminate debt on your own – although it will not happen overnight.

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Either your financial burdens will lighten, or they will reach a newer, more crushing weight too difficult to withstand.

Very few people who pursue debt consolidation end up in the middle.

Such extreme results are common with debt consolidation. And finding yourself on the downside of the process is, unfortunately, much easier than breaking free of nearly insurmountable debt.

Debt consolidation is based on a simple principle. Rather than issuing multiple payments each month to multiple creditors with whom you owe substantial sums of money accruing equally substantial interest, debt consolidation amasses all debts owed into a single bundle tagged with a lower interest rate and customized to allow for smaller payments over a longer period of time.

In theory, this arrangement sounds like a terrific opportunity. And while it can be under the right conditions, many individuals who pursue a consolidation opportunity quickly discover the dark side of debt consolidation.

The Concerns with Consolidation

Despite heavy media campaigns to engrain the opposite message in our collective psyche, debt consolidation loans offer no immediate, universally advantageous, or guaranteed win-win situation. Of the many potential drawbacks to obtaining a consolidation loan, some are more persistent and perilous than others.

• Obtaining a debt consolidation loan (i.e., continuing the practice of borrowing) usually does little if anything to curb overspending, the problem that got the borrower in trouble to begin with.
• Consolidation loans, ironically, can be exceptionally more expensive than the debt they are supposed to help repay.  Because of hidden fees, early repayment penalties, and administrative expenses, obtaining a consolidation opportunity could prove a costly decision over time.
• Debt consolidation has become an industry comprised of many unscrupulous representatives that thrive on people who are prone to financial miscalculations and are taking up yet another loan to battle back against previous debts. In this regard, consolidation loans often serve to merely perpetuate a worsening cycle of debt.
• A high percentage of consolidation loan recipients use their loan to pay off credit card balances but once again max out their various lines of credit before their consolidation loan has been fully repaid.

Although there are myriad steps one can take to reduce their chances of having a negative experience in debt consolidation (shopping around for a competitive loan and rate, checking loan providers for a history of integrity, etc.), the most advantageous aspect of delving into the surprisingly complex and confusing world of debt consolidation is having a learning experience of a lifetime.

Whether it works for you or not, the process of researching (and potentially securing) a debt consolidation loan will, if nothing more, prove an invaluable education in capable money management.

With a proper understanding of skilled financial stewardship, a debt consolidation loan can be an effective, minimally dangerous tool useful for correcting financial transgressions and crises of the past. But it remains vitally important to use any consolidation opportunity to change your money management techniques in order to avoid becoming one of the seven in ten who still remain in debt after repaying their consolidation loan.

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Who Needs a Debt Consolidation Loan?

Debt consolidation loans are primarily intended for individuals or families struggling to manage any form of outstanding debt:

• Credit card debt
• Personal loan debt
• Mortgage or housing debt, etc.

Despite sounding like a highly attractive option that, based on incessant advertising, seems widely available, obtaining a quality debt consolidation loan can be more difficult than one would expect.

Why?

Let’s face it, how many legitimate lenders want to invest in someone who has already gotten into such a tremendous financial predicament? As result of the difficulty born of getting an established, trustworthy company to issue a debt consolidation loan, many desperate borrowers unwittingly find short-term comfort and long-term pain in shady lenders that eventually lead to even more financial problems for down-and-out debtors.

Unfortunately, there is no shortage of surprisingly common debt consolidation mistakes that borrowers make when in the market for this particular financial product.

Avoiding The Dangers of Debt Consolidation

• Hidden Fees. Debt consolidation loans can often be packaged with exorbitant hidden fees and administration costs. Apart from the interest rate you secure, which may depend in large part on your financial history, there are typically processing fees, monthly service fees, and even a fee for each payment sent to your creditors. There is also a vast fleet of companies that actually charge a penalty for paying off your balance early. Be sure to read the fine print and know that every cent you provide pays off more of your debt than your loan provider’s “administrative fees.”

• Old Habits Die Hard. A debt consolidation loan can reduce the onerous process of paying multiple creditors every month. Unfortunately, many confuse a debt consolidation loan for a new beginning. In reality, your debt remains unchanged. Yet, because previously maxed-out credit cards and other lines of credit are now reduced to zero, without great caution, a reckless spender could soon find himself in an even worse position than before – with a debt consolidation loan and a new batch of bills created outside of it. Securing a debt consolidation loan is anything but a license to spend again.

• Trust But Verify. There are thousands of debt consolidation companies that want your business. Many should be avoided like the plague. How do you know which are legitimate, credible agencies? You won’t without conducting adequate research. Never, under any circumstances, take a company’s counselor at his or her word. If they claim to possess any licenses or registrations for conducting business, ask to see them. Apart from shopping around for the best financial arrangement possible, it is doubly important to double check everything you’re told and everything you read so that you know exactly how your debt consolidation process will play out in full.

The Most Important Lesson

Ultimately, no matter how successfully one sidesteps the common pitfalls of debt consolidation, what guarantees that a first loan of this nature will also be the last is seriously addressing the situations, lifestyles, or issues that led to the need for a debt consolidation loan in the first place. At the end of the day, it is just as important for the debtor as it is the creditor to take accountability and responsibility.

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