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Pros and Cons Of Debt Consolidation Loans, Settlement, Credit Counseling, & Bankruptcy

The Pros & Cons of Credit Card Consolidation Loans


First, one must understand the difference between the two types of bank consolidation loans, secured and unsecured. Secured loans are typically attached to some sort of collateral like your home, car, or any other physical piece of property the creditor can take in the event that you stop making payments on the credit. The most common types of secured consolidation are home equity loans or mortgage refinancing. Unsecured loans are personally guaranteed and no collateral is attached, so in the event you default on your payments a creditor will send your account to a third party for collections. Due to the different nature of the loans the advantages and disadvantages of each option are unique:

 

Secured Loans


With a home equity consolidation loan or mortgage refinance, a consumer borrows against the equity in their home to pay off their debt.


Benefits:


  1. -One monthly payment makes your debt situation much more manageable
  2. -Payment is typically lower than what you are paying on your credit cards and other debts that are being consolidated
  3. Interest can be reduced dramatically (depending on your credit of course)
  4. -Interest payments on mortgage loans are tax-deductible (this does not apply to loans secured by other property like cars or electronic equipment, for example).

Drawbacks:


  1. -Your loan is secured by a presumably important piece of property you own – Losing your home can be a catastrophe from a financial and emotional standpoint.
  2. -Many consumers who borrow against their home find themselves in the same position several years later, except they do not have the equity in their home anymore and their credit card balances are bigger – Since many debt problems are the result of overspending and debt consolidation loans do not require people to close their credit cards, many people continue charging their cards, making their financial & debt picture much worse.
  3. -The monthly payment can still be too high for a lot of people.
  4. -Qualifying can be difficult – Not only does it require that you own a substantial stake in a valuable piece of property, but you must also have the income and credit score necessary to qualify.

Interested in having a real conversation with someone about the dilemmas raised here? Fill out a form and PayingPaul.Com can get you in touch with a debt consultant immediately!

 

Unsecured Loans


Pluses:


  1. -One monthly payment makes managing your debt easier

Minuses:


  1. -The interest on these loans can be extremely high, worse than your credit card interest in some instances.
  2. -Some lenders who see consumers with these types of loans on their credit report interpret it as a sign that the person is seriously overextended – Because these loans can be so unattractive they are rarely used by people with other options.

Filing Personal Bankruptcy


Like debt consolidation loans, one must first understand the different types of personal bankruptcy before recognizing the rewards and problems with each one. Chapter 7 Bankruptcy involves liquidating any of your non-exempt property (or giving the equivalent in cash) to pay off your unsecured debt. In exchange, you are freed of your unsecured debt obligations. Chapter 13 Bankruptcy involves setting up a three to five year payment plan, where you give your disposable income over to a court trustee who in turn disburses payments to your creditors.

 

Chapter 7 Bankruptcy


Pros:


  1. All of your debt can be eliminated very quickly
  2. -Creditors must stop all collections activity immediately once they learn you intend to file
  3. -Can stop most wage garnishments and wipe most judgment liens off your property
  4. -If you have no assets, you can become debt free without paying anything

Cons:


  1. -Severe credit impact; stays on your credit report for 10 years
  2. -If you own assets that are not exempt in your state, you could be forced to sell them and use the money to pay off your creditors.
  3. -Some consumers complain of depression, guilt, and other emotional problems after filing due to sense of failure to satisfy their debts.
  4. -The process can be very unpleasant, as court trustees and the bankruptcy courts scour your financial information to determine whether you can pay the debt back or if you took out the debt without ever intending to pay it back.
  5. -Bankruptcy stays on legal records for up to 20 years
  6. -Many job and loan applications ask, “Have you ever filed bankruptcy?” Lying in your answer to this question on a mortgage application is a federal crime.
  7. -Because of bankruptcy law changes qualifying for Chapter 7 has become more difficult.

 


Chapter 13 Bankruptcy


Advantages:


  1. -One monthly payment
  2. -Less long-term damage is done to one’s credit versus Chapter 7
  3. -All collection activities must stop immediately upon filing
  4. -It is the only debt option for certain debts (not credit cards, personal loans, repossessions, medical bills, or most accounts in collections)

Disadvantages:


  1. -It still will affect your credit negatively for seven years
  2. -You will have to turn over your disposable income for three to five years – Do not underestimate how long of a period of time this is to have spending money. Also, if you are filing Chapter 13 and your income is high, the court determines what your disposable income is based on county averages, not what your actual expenses are.
  3. -It can be extremely challenging – Some estimates show that almost 70 percent of all Chapter 13s are never completed.

Not sure about bankruptcy? Fill out a form today!

 

Consumer Credit Counseling


Consumer credit counseling is a form of debt consolidation that involves lowering your interest rates, consolidating your payments and potentially waiving late fees to make managing your debt much easier.


Pros:


  1. -One consolidated monthly payment
  2. -Normally a lower monthly payment than credit card minimums
  3. -Shortened time frame for becoming debt free – programs last four to five years typically
  4. -Offer educational services to help people budget and stay out of debt
  5. -Can have late fees, over the limit charges waived
  6. -Stop debt collection calls immediately in some cases

Downsides:


  1. -Monthly payment may not offer enough relief – Debt is paid back in full and sometimes only minor interest rate concessions are offered, leaving minimal savings opportunities for the consumer.
  2. -In light of point number 1, the program length can be too long and even one missed payment is enough for a credit card company to kick someone out of the program, increase their interest rates, and reinstate any applicable late fees.
  3. -Many lenders consider Consumer Credit Counseling to be on par with Chapter 13 Bankruptcy in terms of the credit report implications.
  4. -Credit card companies can refuse to offer any concessions altogether – When a credit counselor is offering proposals to the creditors, the consumer stops making payments. So if the rate reductions are refused, the consumer is left with a late payment marks on their credit, late fees and an increased interest rate for being late.

Want to speak with someone about whether debt counseling is right for you? Submit your info for a free consultation!

 

Debt Settlement & Negotiation


Advantages:


  1. -Dramatic savings on the monthly payment
  2. -Dramatic savings potential on the balance
  3. -Shortest time frame for getting out of credit card debt without filing bankruptcy
  4. -Your debt negotiation company can take steps to reduce your creditor calls if your accounts are in collections.


Disadvantages:


  1. -Creditors only settle on past due accounts, so enrolling in this type of program will likely affect your credit severely, particularly in the short-term.
  2. -Creditors can refuse negotiations altogether and pursue legal action to collect the full balance. In the event this happens, a creditor can garnish your wages, put a lien on your property, or levy your bank account.
  3. -Interest accrues throughout the course of the program, which can have an effect on what your settlements end up being. More importantly, in the event that the point in #2 does occur, you could end up paying more than what you originally owed.
  4. -Debt collection calls are inevitable during the course of the negotiation process, despite any attempts to minimize these calls by the company.
  5. -Your savings can be taxable by the IRS.

 

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