When your bills are piling up and your creditors can't spare you the time of day, you need to take action. Debt consolidation is one way of getting out from under high interest rates and harassing collectors. But be careful: Traditional debt consolidation through a home equity loan or a credit counselor isn't for everyone, and tapping your home equity could cost you your home. Bankruptcy, particularly a Chapter 13 repayment plan, is an alternative that can offer you more protection than other debt consolidation.
Contact your bank or credit union and ask about consolidation loans. Depending on your credit and income, you may be able to secure a loan that can pay off all your bills at a lower interest rate than your creditors are currently charging you. Another option is to transfer your debts to a new, low or no-interest credit card.
Contact both a legitimate credit counseling agency (one approved by the U.S. Bankruptcy Trustee or by the National Foundation for Credit Counseling) and a bankruptcy attorney. This tip comes from personal finance expert Liz Pulliam Weston in her MSN Money article "Why Credit Counseling often Fails." Her reasoning is that you need to learn about both your options to make an educated decision. If your finances are really bad, you may simply not be able to afford the payments on a consolidation loan or a debt management plan offered by a credit counselor. When this happens, you may end up having to file for bankruptcy anyway. Incidentally, if you are uncomfortable about not repaying your debts, ask your lawyer about Chapter 13 bankruptcy. Chapter 13 is a repayment plan that protects you from collection action (such as harassing phone calls or lawsuits) while you pay down your debt.
Review the information that each resource gives you after you get home. This is a major decision so think it through. Don't be afraid to call back and ask questions, or to verify what a credit counselor, loan officer, or lawyer tells you by doing your own research.
- Be wary of home equity loans: If your debt is mostly unsecured (credit cards, medical bills) there is little point in risking the loss of your home just so you can get them paid off.
- There are many scammers out there posing as "debt settlement" firms or even as "credit counselors". These organizations charge high fees, may not perform contracted services, and can leave you worse off than before. Only work with legitimate credit counseling agencies or a bankruptcy attorney when trying to cope with debt.
Lainie Petersen writes about business, real estate and personal finance, drawing on 25 years experience in publishing and education. Petersen's work appears in Money Crashers, Selling to the Masses, and in Walmart News Now, a blog for Walmart suppliers. She holds a master's degree in library science from Dominican University.