Bankruptcy can ruin your credit for 10 years or more, making it almost impossible for you to buy a house, get a car and sometimes even get a job, so before you decide to declare bankruptcy over your credit card debt, check out your options for debt consolidation.
Debt consolidation is a program in which professional debt negotiators work with your creditors to lower your monthly payments by either lowering your interest rates or even the principle you owe. Debt consolidation works on your unsecured debt. Unsecured debt is debt such as credit cards and loans without collateral. Most debt consolidation programs will not work with auto loans, mortgages, co-signed loans or loans with collateral.
Because the average debt consolidation program does not cover secured debt, many people will be tempted to take out another loan to “fix” deep debt for these types of debt. This is the last thing you want to do. You will usually have to put your house up as collateral and have extremely high interest rates which will plunge you deeper into debt and you do not want to stand the chance of losing your most precious asset: your home.
Sometimes the debt consolidation negotiators will get the creditors to actually forgive some of your debts. This may sound wonderful, but you have to be wary because this can be slightly hazardous to your credit and to your taxes. Sometimes these forgiven debts can be written off on your taxes because you are so deep in debt. Talk to your tax adviser about it. Also, these forgiven debts may also show up on your credit report.
The other point of which to be aware for your credit rating when using debt consolidation is this program shows up on your credit report as a “Third Party Management Program.” Also, these debt consolidation programs usually charge a monthly fee simply for their service on top of what you are already paying for your bills. But your creditors with whom you are currently working will be more understanding as you are enrolled in debt consolidation and will be more likely to extend grace periods and waive late fees. The debt consolidation groups also have long histories with creditors and can usually help you get your principle paid down in two to four years.
Debt consolidation helps you get on top of your bills, but you cannot keep adding to them by continued use of your credit cards. Smart budgeting is the key. Some debt consolidation companies will offer you budgeting help as well.
Remember, debt consolidation is not a cure-all, nor a “fix” for your credit. Debt consolidation a method for getting out of debt and will help you to pay your creditors the money you owe them. As you work to pay down your debts, your credit will get better and you will be able to get back to where you once were. Remember, it was your good credit that gave the creditors the confidence in you in the first place. Debt consolidation can help you restore that credit and then you can use it wisely.