Review of Debt Consolidation Options

In this poor economy, few families are safe from financial instability. If you use credit, you may be at risk for a sudden financial shock that could send your entire world into a tailspin.

Even if you have a seemingly secure job and a stable living situation, you could be just one pink slip and a few missed credit card payments away from filing for bankruptcy. It's time for you to take matters into your own hands and fix your finances for good.

There's no one-size-fits-all approach to debt relief. After all, every debt problem is different. Your debts could be comprised mostly of high-interest credit cards and some outstanding commercial loans from an old business venture. Alternatively, you could be stuck with an adjustable-rate mortgage that has doubled in cost since its origination. You might have a mixture of retail-store credit cards, auto loans and medical bills. You could even be struggling to pay off a court settlement from a car accident that occurred years ago.

From your perspective, these situations might appear to be similar. After all, they all involve seemingly insurmountable loads of high-interest, high-balance debt that you can't seem to escape. In each situation, you might worry about falling behind on your payments or missing them completely.

If you've already missed a payment or two on one of your debts, you may be receiving intimidating calls from its original issuer or a third-party collection agency. You may even have received official-looking correspondence threatening to take legal action should you continue to refuse to pay.

Before you panic and take the drastic step of declaring bankruptcy, chew on this age-old piece of debt relief advice: All debts are not the same.

Even though they both perform similar functions, it's obvious that auto loans are different from retail-store credit cards. A car note exists to help you afford a new vehicle while a retail-store credit card exists to encourage you to shop at a particular store.

However, there's a more fundamental difference between these two types of debt: Your auto loan is "secured" while your credit card is "unsecured." In other words, the auto loan is tied to the physical asset that it was used to purchase while the credit card is backed only by your promise to repay its balance in full.

If you're forced to default on your auto loan, your lender can repossess your vehicle. If you must stop making payments on your credit card, you should follow another sound piece of debt relief advice and enroll in a program of debt consolidation.

All of your unsecured debts are eligible for debt consolidation. In addition to credit cards, unsecured debts may include medical bills, legal settlements, judgments, business debts and collection-agency debts.

Secured debts like auto loans and mortgages aren't eligible for consolidation. However, consolidating your unsecured debts can help make your secured debts more affordable and reduce the chances that you'll lose your home or car to bankruptcy.

There are several ways to consolidate debt. You could follow the herd and opt for a debt consolidation loan that bundles your high-interest unsecured debts into a lower-interest loan that requires just one payment per month. Then again, debt consolidation loans have stringent eligibility requirements and may take five years or longer to repay.

You could also enroll in a nonprofit credit counseling program. Credit counseling agencies can negotiate lower interest rates on your existing debts and help you put a stop to phone and e-mail harassment from your creditors. Unfortunately, credit counselors often charge upfront and ongoing fees for their services. What's more, credit counseling repayment plans often stretch on for seven years or more.

Instead of entrusting your financial future to a risky debt consolidation loan or a lengthy program of credit counseling, consider an alternative that may be better for your situation – debt settlement.

A debt settlement program may actually reduce the total amount that you owe to your creditors. Instead of reducing your interest rates or bundling your obligations into yet another credit facility, a debt negotiator attacks the heart of your debt problem and negotiates lower balances with each of your creditors. Even better, they won't charge you any upfront fees until your debts have been settled.

A debt settlement company may be able to reduce your debts in the span of two to four years. Keep in mind everyone who wants to settle their debts may not be eligible for a debt settlement program. You must be able to set aside several hundred dollars a month towards a settlement fund. If you are not able to accomplish this then bankruptcy may be the route for you.

Debt settlement is an alternative to Chapter 13 bankruptcy. It will not hurt your credit score as much as a bankruptcy filing and you can recover from settling your debts faster than Chapter 13. But it is still not for everyone. You can talk with a bankruptcy lawyer, debt counselor and debt negotiator and discuss your consolidation options before you decide on your best course of action.

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