Debt management and debt consolidation are both tools that can help make your debt more affordable. In fact, debt consolidation can be part of a debt management strategy. Here’s how.
Debt Management Techniques
Debt management usually involves making a monthly payment to a debt management or credit counseling company, which then divides the payment between your unsecured creditors each month. A good service should also counsel you about dealing with debt and teach you to budget and spend wisely. In addition, the service should negotiate lower interest rates and payments from your creditors.
Debt Consolidation Loans
A debt consolidation loan can accomplish the same thing–you take a loan (the best interest rates can be found with a home equity mortgage) and pay off your creditors. Then you make a single payment each month until your loan is paid off.
Chapter 13 Bankruptcy Is Debt Management, Too
A Chapter 13 bankruptcy is a debt management plan overseen by a bankruptcy trustee. The court determines what payment is affordable for you and the creditors are forced to accept it. In three to five years, you complete your plan and any remaining obligations are discharged.
What’s the Best Solution?
The best solution depends on a few things–your credit score, your home equity, how stable your income is, and how nice your creditors are willing to be to you.
- Home Equity for Debt Consolidation If you have lots of home equity and decent credit, consolidating debt with a home equity loan can really cut your interest rate. And you won’t incur monthly charges to a management company. But you do want to accelerate the home equity loan’s payoff as much as you can–if you keep that loan for 15 years you could end up paying a lot more in interest. The second home equity consideration is how stable your income is–once you turn unsecured credit card debt into a debt secured by your home, you won’t be able to discharge it with a bankruptcy. If the home equity payment becomes unmake-able, you could lose your home as well.
- Debt Management Solutions A debt management company is a great solution because it includes education. You are better off in the long run if you understand money and how to manage your debts. If shaving a bit off your interest rate and lowering your payment is enough to get you out of trouble, that’s the way to go. Just make sure that your service is reputable and verify how much of your payment is going to the creditors each month. In addition, get a written schedule so you can see how long it will take to repay your debts under the plan.
- Chapter 13 Bankruptcy This is the most drastic solution, but if your creditors aren’t willing to drop your interest rates and payments, a judge can make them. The payment under a Chapter 13 plan may be more manageable than what your creditors want you to pay. In addition, if your income changes, a judge can adjust your payment accordingly. Finally, there is a bright light at the end of that tunnel–as long as you complete your plan as required, your debts are discharged. You’re done in three to five years.
Understand all the solutions available to help you manage your debt problems. Then choose the best one for you.