by John G. Merna, Esq.
Being overwhelmed with debt causes an enormous amount of stress. The stress is created by the thought of not being able to pay each time a collection notice or harassing call is received. Most people would like to believe they can deal with the stress, but the truth is that it becomes the background noise of your life – a subconscious stress that is always there even when you are not thinking about your bills. It causes you to lose sleep. It causes you to stress over the unknown such as lawsuits, garnishments, foreclosures, unemployment, or even homelessness. It causes you to make well-intended decisions with bad financial consequence that can worsen your overall financial and credit situation.
Often the options to deal with debt are few. There is debt settlement, debt consolidation, and even debt consolidation through a Chapter 13 bankruptcy.
Debt settlement requires a large sum of cash to pay the agreed settlement amount, which often makes this option unavailable to most.
“Debt Consolidation” as a term refers to a variety of debt restructuring options. Below are the primary types of debt consolidations and how they differ.
EARLY-BIRD DEBT CONSOLIDATION OPTION:
Bank Loan Consolidation Loan – In general, a bank or credit union consolidation loan is an option for someone who may be current but struggling with a large monthly outlay on several debts. Consolidating several debts into one with a lower interest payment can reduce your monthly payment significantly. If you approach your bank early enough before you have fallen behind on your bills and your credit rating is good then you might be able to get a consolidation loan. Wait until your credit is affected and this option may no longer be available.
“A LITTLE BEHIND” DEBT CONSOLIDATION OPTION:
Credit Counseling Agencies & Online Consolidators – The next option if you are behind on your payment and may not qualify for a consolidation loan is to go through a repayment program. The credit counseling agency or company assists by reducing the interest rate through negotiation with each of your creditors and acts as your intermediary to distribute your payment. It may feel like your debt is consolidated because you pay one payment to the credit counseling company, however, in reality the debt is still owed to each company separately. This option is helpful when the total debt amount is fairly low. The general repayment time is from 36 to 48 months. To assure you are not being taken for a ride you should do the math. Based on the monthly payment you are quoted and the adjusted interest rates, will the balances due be paid off? This is a very important question when you are dealing with a “for profit” consolidator. My recommendation is to use a non-profit when possible and certainly check to see that they are reputable, licensed, and have been in business a while. There are many scams out there. In general, the higher your debt the less likely a credit counseling or consolidator can help you.
“IN SERIOUS NEED OF RESTRUCTURING” OPTION:
Chapter 13 Debt Consolidation and Restructuring – As you might already know, Chapter 13 is the form of bankruptcy designed to restructure debt instead of eliminate it as is done in a Chapter 7 bankruptcy. Here are some pros and cons about using Chapter 13 to consolidate your debt.
Pros of a Chapter 13 Debt Consolidation:
- Able to “force” creditors to accept the repayment plan;
- Lower the monthly payment significantly;
- Strip mortgages & liens on property; – Short repayment term (3 years minimum);
- Stop all interest and penalties on unsecured debt;
- Lower interest on car loan;
- Catch up on missed mortgage payments;
Protect from garnishments & lawsuits. Cons of a Chapter 13 Debt Consolidation:
- – Repaying instead of eliminating the debt in a Chapter 7;
- – A three to five year repayment term;
- – Restricted from taking out financing over $5k;
- – Payment vulnerable to being increased;
- – Does not change monthly mortgage payment or balance on mortgage.[/box]
A Chapter 13 debt consolidation has one great advantage over a non-bankruptcy type of consolidation which is forcing the creditors to accept the consolidation program. In a non-bankruptcy debt consolidation it is voluntary on the part of the creditor and they do not always participate.
I hope this articles was helpful. If so, I would ask that you hit the “Google+1” button at the top to assist others in finding it. As always, we offer a free consultation if you would like to sit down with an attorney to discuss how a Chapter 13 debt consolidation can help you.
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