If you are going to do debt consolidation, credit counseling, or are considering it, then do it under Chapter 13 of the United States Bankruptcy Code. You set the plan approved by the Court, and make payments pursuant to Federal Court Order that stops interest, stops late fees and stops telephone calls. Get the leverage of a Federal Court behind you.
We have had client after client go to the consumer credit counseling services only to find out (1) that the monthly payment was too high, (2) that credit card companies refused to lower interest rates, (3) that payments made were not accounted for or properly distributed to creditors. Frankly, the legitimate consumer credit counseling services are paid for and funded by the credit card companies - are they your friend? Other consumer credit counseling services, well, they just take your money.
Dangers of debt counseling
Be a savvy consumer of debt counseling or debt management programs. It is an unfortunate truth that not everyone offering to help you get control of your finances has your best interests (as opposed to their own) at heart.
Approach debt consolidation loans with skepticism
While a loan to consolidate all of your debt into a single obligation is appealing and may have a lower interest rate than the credit card interest rate, make sure that you can really repay that amount. Understand clearly the term, and interest rate on the loan.
It may be that even lowering the interest rate does not make your present debts manageable, it just postpones the day of reckoning. Find out whether the loan will pay off over the life of the loan, or whether you will owe a "balloon" payment at the end. For most borrowers, balloon payments are just an invitation to another loan, and you never get free of this debt!
Home equity loans may put your home in jeopardy
If you can't pay your present unsecured debts, all your creditor can do is sue you and try to collect any judgment it gets. If you can't pay your home equity loan, you may lose your house in foreclosure.
Most states provide an exemption that protects a given amount of equity in your home and puts that equity beyond the reach of your creditors. If you voluntarily pledge that equity to a creditor, the exemption no longer protects your home.
Understand the program
If you participate in a program where a service negotiates with your creditors or makes payments on your debts for you, understand whether the service promises to lower the amount you owe or the interest rate you pay, or just promises to lower the payments you make every month, without significantly changing your obligation. Know what happens if a creditor won't negotiate.
Make sure the program deals with all your debt
Some debt counselors confine themselves to dealing with your unsecured commercial creditors, excluding your obligations for child support or unpaid taxes. In effect, they ignore the debts that won't go away, while channeling your money to creditors whose claims could be discharged in bankruptcy.
There are several debt management programs with modest cost to you, the client. Approach for- profit or fee- based services with caution and make sure that the service is worth what it costs.
Make sure that you don't worsen your situation by enlisting others to help with debt management. While it is comforting to have an ally in your struggle, make sure that their help has your best interest at heart.
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