The Game of Debt Consolidation

Are you unsure if you should declare bankruptcy or go the debt consolidation route? Follow these easy steps to see which option works best for you.

First, give yourself a reality check:

• Have your credit cards reached their credit limit?
• Do you pay only the minimum or less on any of your credit cards each month?
• Do you juggle other bills to make the minimum payment on credit cards?
• In the last year, have you gotten a payday loan?
• Have you been paying late fees on overdue credit or store card bills?
• Do you use cash advances from one credit card to make payments on another?
• Has a collection agency contacted you about an unpaid debt?
• Have you recently received a court notice, or a letter about bailiffs or a sheriff coming to your home?

If you have answered yes to any of these questions, it’s time to proceed to:

Step One: Considering Debt Consolidation

What Is Debt Consolidation?

Debt consolidation is getting a single loan to replace many unsecured debts, such as credit card balances. For example, if you owe money on a line of credit, four credit cards, and a finance company loan, you can get a debt consolidation loan to repay all of your debts, so that you only have one payment instead of six payments each month.

Do I Qualify for a Debt Consolidation Loan?

In order to qualify, you must:

• Give the bank a copy of your monthly budget. This is to prove that you have the ability to make payments;
• You must have a stable source of income, such as employment wages;
• You may require a co-signer or collateral;
• If you have poor credit, a co-signer will probably be required. Asking someone to co-sign for you is a difficult decision and should not be taken lightly, as any non-payment by you will directly affect your co-signer’s credit score.

As a general rule, if you can afford to repay all of your debts over a three to five year period or less, then a debt consolidation loan is probably the correct option for you. If you don’t qualify for a debt consolidation loan, then you should proceed to:

Step Two: Credit Counseling

What Is Credit Counseling?

Credit counseling is a professional service from a credit counseling agency. They provide two main services:

• Education on personal management of finances and credit, including credit cards;
• Debt management plans, in which an arrangement is made by a credit counselor between you and your creditors. You make a single monthly payment and the counselor makes payments to the creditors.

For example, if you owe $20,000 to five different credit card companies, the credit counselor would create a debt management program for you where you pay the credit counselor, say, $500 per month. The money is distributed to your creditors and over a 40 month period all of your debts are paid off.

If you don’t qualify for credit counseling, you should proceed to:

Step Three: Bankruptcy

What Is Bankruptcy?

Bankruptcy is a way for people who have more debts than they can handle, either to work out a plan to repay the money they owe over time, or to eliminate their debts entirely.

A plan to repay some or all of the money owed over a period of time is called a Chapter 13 plan.

If payments cannot be paid over time, an individual can file a bankruptcy under Chapter 7, where assets are liquidated and most debts are discharged.

Whichever chapter you choose, note these key facts:

• Bankruptcy is complicated, with local variations in the laws. It is important to consult a bankruptcy lawyer before you file;
• Before you file for bankruptcy, and again before your Chapter 13 bankruptcy is finally discharged, you much obtain credit counseling from a non-profit credit counseling agency.