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Debt Consolidation as a Last Resort Option to Settle Debt

Falling behind on your debt can have such a severe negative impact on your entire life, and debt consolidation may just be more than a live saver at that point.

For different purposes, a business organization may apply for a loan from an institution, and if it meets the necessary requirements for the loan, it is awarded the necessary bond. However, various factors may derail the repayment of debt. At this point, seeking debt consolidation loans seems to be the only way forward. It will be of great help, especially if you are looking to improve your credit score and get a lower interest rate while paying off your debt.

As we continue, we will take you through the meaning of debt consolidation and how it works. We will also briefly discuss the steps that you need to take when it’s most likely that you are heading into a “bad debt” situation where consolidation loans will not work. Read on!

What is Debt Consolidation?

Debt consolidation is a financial plan whereby several bills are collapsed into a single debt. After that, the debt can be serviced by a loan or a management program. This financial plan works out particularly for debts with soaring interest rates. A typical example is credit card debts, where it is less difficult to service any indebtedness under this debt arrangement.

The entire process lessens the problem that consumers go through in every month just to catch up with paying for several bills from different credit card institutions as well as obey the deadline. In lieu of this, only one payment is made to service one debt once every month. Even students who unknowingly borrow too much, just to have a comfortable education, can obtain a student loan debt consolidation.

Photo Credit: Ryan Born (Unsplash)

Operations and Procedures

Debt consolidation operates by decreasing interest rates, as well as the monthly payment, to a lesser percent. 

Before you seek for debt consolidation loans:

  • Firstly, determine the total sum which you pay for all credit cards every month. You must also take note of the average interest you pay on those cards every month.
  • Secondly, account for your budget every month. Note the net amount of money you spent on foods, house rent, utilities, and transportation every month.

When you subtract (b) from (a), what amount will be left? For some persons, the remainder will be enough to service debt when their budget is right. And in order to repay your debt, there must be the zeal in you to become debt-free and quit being debt-ridden.

Sadly, the right budget and passion for becoming debt-free are not as common in debtors, as you would think. This is the time where a debt management program or debt consolidation loan comes in, since both are ways of obtaining debt consolidation.

Debt Management Program

It is feasible to consolidate your debt and decrease your monthly repayments without applying for another loan.

Credit counseling agencies provide non-profit debt consolidation via debt management programs that do not request the debtor to apply for another loan.

What the credit counseling agency does is to meet with the representatives of the card companies. There, your agent will bargain for you until he successfully reduces your interest rate and monthly repayment to a bearable level.

When the loan consumer sends the lowered monthly payment to the credit counseling agency, the latter shares the amount with the respective creditors using an agreed formula. A clause adding “fee for late payment” in the loan contract may be waivered by the credit card company if strategically bargained for by the credit counseling agents.

Well, that may not be a quick fix for your debt, taking into consideration that debt management programs may take about three to five years to clear off the debt. And if you fail to meet up with the new monthly payment formula, then the card company can renege on the reductions gained on the interest rate and monthly payment.

Debt Consolidation Loan

This is the use of loans with little interest rates to settle multiple debts with high interests. It can be obtained from banks, online lenders, or credit unions.

The duration for paying back is about three to five years. However, what matters is what interest rate you were charged.

All lenders would definitely like to know your credit score before deciding what interest rate to place on your debt consolidation loan. When the average interest rate which you pay on your credit card is not higher than the interest rate offered to you for a debt consolidation loan, that means the consolidation loan is not helpful to you.

Planning on Seeking Debt Consolidation Loans? Then Be Mindful of This:

The heart of debt consolidation is:

  • A cheap fee, paid once a month, into one source.

A look at it makes it look simple, and it really is; however, you have to be decisive in your action. If the weight of your credit card debt is starting to worry you too much, as much as it affects your social or psychological life, and you want to remain qualified for further credit card loans in the future, you must consider debt consolidation before you lose all rights to credit card loans.

What Other Options Can You Explore to Pay Off Your Debt?

If you really want to walk that lane, there is not a problem. Debt consolidation is usually the first way to settle debt before it gets too big. However, at a certain stage of accruing debt, what you owe could become life-threatening. This is when another option can be looked into.

Photo Credit: Melinda Gimpel (Unsplash)

In this case, it is filing for bankruptcy. This option exists on the table when there is no way in hell you can clear off your debts. The court will provide you with an “automatic stay” if you meet requirements for bankruptcy kind, which you file for. Bankruptcy has three common types: chapter 13, chapter 11, and chapter 7.

Under chapter 7, you will have to liquidate some assets like a car or another home of yours to enable you to settle some of the debt.

For chapter 13, you are provided a three to five years period to clear all debt. Good thing you get to retain your assets. To qualify, you must meet stringent requirements. They are:

  • A secured debt that is not more than $1,149,525. (Secured debt is debt that involves collateral such as vehicles).
  • Unsecured debt that doesn’t exceed $383,175. (No collateral involved in debt).

Chapter 11 works well for business organizations. A legal court will give them time to re-organize their business without liquidating their assets. A meaningful structural reorganization will convince the court and lenders that the debt is payable under a newly issued time-frame. But they have to bring up a plan to have parts of the debt forgiven, or at best, paid. Debt consolidation provides debtors an easier route to becoming debt-free. Every credit card debtor must consider it once they start noticing difficulties in meeting up with monthly payments, just before things get out of hand for them.

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