Should I File Bankruptcy? How can I Avoid Bankruptcy? How does Bankruptcy affect Your Life? What is Debt Consolidation? What is Credit Counseling?

What is Debt Consolidation?

dollar signDealing with debt can be a long and arduous battle for a lot of people—mounting bills, past due notices and calls from collection agencies can be quite overwhelming. Many people facing these circumstances are not aware of the different relief options available to them and may jump into a debt relief program without fully understanding the repercussions of taking such an action. If you have found yourself in over your head in debt, it is important to take action that is best for your situation.

Debt consolidation is the process of merging all of your unsecured debt into one, lower monthly payment. There are two ways to accomplish this: debt consolidation loans and debt management plans (DME). Both types of debt consolidation will appear on your credit report, and while it may not always affect your credit score, it may affect your ability to get credit in the future since lenders do take these types of debt relief measures into account when determining a person’s credit risk. If you have too much debt and an inability to pay your monthly bills, you may want to consider debt consolidation before filing bankruptcy (see Should I File Bankruptcy?).

Debt Consolidation Loans
Debt consolidation loans are a way to pay off your outstanding debt by borrowing money and becoming accountable to only one lender instead of several. Debt consolidation loans are a viable option for people who have the ability to easily make the new monthly loan payment, but can be disastrous for people who end up defaulting on the loan.

Debt consolidation loans can be secured or unsecured. When you take out a secured loan, you generally receive a lower interest rate since you pledge some sort of collateral (e.g., house or car) against the loan; however, this also means that if you default on the loan, you may lose whatever property you used as collateral to secure the loan. Secured loans have many benefits: they allow you to pay off your existing debt, reduce your monthly bill and significantly reduce the amount of money you pay in interest, potentially saving you a tremendous amount of money over time.

An unsecured loan may be more difficult to get if you have bad credit, since most lenders will use your credit score to determine if you are eligible for a loan. Unsecured loans generally have higher interest rates than secured loans since you have no collateral to put up against the loan. Despite this, the interest rate may still be lower than the rate you are paying on credit card balances, allowing you to make lower monthly payments and save money. Be sure to do the math to see how an unsecured loan can pay off your current debts and save you money in the long run.

Debt consolidation loans may also provide certain tax advantages to debtors. For example, if your debt consolidation loan is connected to your Home Equity, the interest you pay may be tax deductable. Speak to a tax professional to learn what tax benefits you may be eligible for with certain debt consolidation loans.

For many people, consolidating their debt into one lower monthly payment is a great way to regain control of their financial situation. However, it is important to be aware that the temptation to incur new debt will be difficult to resist without changing your spending habits and philosophy on credit. By paying off your outstanding debt with a consolidation loan, your available credit will go up, making it tempting to go further into debt. Be sure to exercise discipline in your spending after taking out a consolidation loan so that you do not end up in a position where your only option is bankruptcy.

While many people take out loans like a Home Equity Line of Credit to consolidate their debt, there is much debate about the philosophy of taking on new debt to pay off old debt. While the convenience of making one monthly payment may be enticing, make sure you check with an experienced bankruptcy attorney or financial professional before consolidating your debt into one loan. A professional should be able to tell you the unforeseen repercussions you may face for taking out a debt consolidation loan.

Debt Management Plans
Debt management plans (DMPs) are plans to help you pay off your unsecured debt without taking out a loan to do so. These plans are offered through debt consolidation companies who negotiate with your creditors to work out a repayment plan and reduce your monthly payment.

Once a repayment plan with your creditors has been reached, the debt consolidation company will be in charge of dispersing money to your creditors every month. To do this, you will make one monthly payment to your debt consolidation company who will then use the money to pay each of your creditors. While you are participating in a debt management plan, you will not be able to continue using your credit cards (see FAQs: Should I close my credit card accounts?).

Some of the benefits of debt management plans are that you only have to make one monthly payment, that payment is lower than what you normally pay, and you can schedule when to make your monthly payments so that you can still fulfill your other monthly obligations like rent/mortgage, food, gas and childcare. Additionally, you may withdraw from a consolidation at any time; however, keep in mind that your benefits with creditors will end if you do so.

While debt management plans offer many benefits, it is important to be cautious when dealing with debt consolidation companies. Some companies are unscrupulous and unreliable. They may not pay your creditors on time, lead you to believe your creditors have accepted a repayment plan that they have not agreed to, or be deceitful in representing their fees. For these reasons, it is imperative that you check out any business with your state Attorney General before entrusting your finances to them. Find out if the company must be registered in your state and if it is, learn about all fees upfront and make sure you understand the specific terms of the debt management plan.

Not all creditors are willing to participate in debt management plans; so, it is important to check with your creditors before agreeing to any services offered by a debt consolidation company. Also, it is important to make sure that your debt consolidation company is fulfilling their promise to you. Be sure to check your monthly statements from creditors to make sure they are receiving payments through your debt management plan. Remember, you are ultimately responsible to make sure that your creditors get paid according to your debt management plan.

As you consider what debt relief option is best for you, the only way your financial situation will change long term is if you change your attitude toward money and spending. Debt counselors can help you develop a budget, teach you how to live within your means and give you access to financial education tools that can help you avoid making the same financial mistakes in the future. But only you can choose how successful you will be with your finances in the future.

It is usually a good idea to speak with a bankruptcy attorney before making any major decisions regarding your debt. An experienced attorney should be able to help you understand the short and long term consequences of the various debt relief options that are available to you. He or she should also be able to recommend the best course of action for you to take given your particular circumstances and goals.

To determine if you should file bankruptcy, you should first assess the true nature of your financial situation. While you may be going through a hard time, it is important to determine if your circumstances warrant filing for bankruptcy. Ask yourself questions about how you use your credit card; if you are only able to make the minimum payment each month, use your card to pay for everyday expenses because you do not have cash, or continually make late payments, you may want to consider consulting a bankruptcy attorney to discuss your options.

After looking at how you use your credit cards, it is important to understand where your money is going. To get an idea of how you are spending your money, keep track of every penny you spend for a month. This will help you determine how you are using your money. After a month, you should go over your spending report and determine how much money is being spent on wants and how much money is being spent on needs. Reducing the amount of money you spend on unnecessary pleasures in life may allow you pay off your creditors and get back on track with your finances. If, however, you discover that you are spending most of your money on necessary living expenses and have no money to spare to pay back your debts, bankruptcy may be an option to discuss with a bankruptcy attorney.

Once you understand your spending habits it is a good idea to develop a budget and stick to it. A budget should allow you to live comfortably while at the same time, afford you the ability to start paying off your debt. If you are still not able to make full payments on outstanding debt, it is important that you discuss your circumstances with your creditor. Keep the lines of communication open as many creditors offer payment programs that can help you pay off your debt.

Filing for bankruptcy is a very personal decision that is not easy to make. If you are not sure what to do about a stressful financial situation, it is usually a good idea to discuss your options with a bankruptcy attorney before you make any major decisions. If you need help locating a bankruptcy lawyer in your area, use the location tool at If you are interested in the appropriate forms to file, you can find them at

A bankruptcy attorney should be able to advise you about alternatives to bankruptcy that may be better for you.