Debt Consolidation & Settlement
Should I get a debt consolidation loan?
To obtain a low interest loan to pay off debts usually means pledging the most valuable item a person owns, such as their house. These types of consolidation loans are used to pay off high interest credit cards and concentrate on paying off the secured house loan. Now, while this option may be good for some people, there are a few fundamental problems:
- You are betting your most valuable item in the world that you can make all your payments on time, your home. Although almost all debt consolidation programs insist on timely, regular payments, they are likely to be more willing to work with you if you need to make one or two late payments due to a medical or some other emergency. Pledging one's very home to pay off excessively high interest payments and debt should be avoided.
- By taking out a loan, you're not taking advantage of the breaks on interest and sometimes even the principal that a credit counseling service can negotiate on your behalf.
- Finally, research shows that within a year after consumers transfer credit card debt to a secured loan the credit cards continue to be used and actually have higher balances than before the home loan. The FDIC concluded, "...some consumers will increase credit card and other consumer debt after a debt consolidation package is completed, thereby weakening their ability to repay outstanding debts and increasing the likelihood of bankruptcy."
A debt management plan is easier to obtain than a consolidation loan, as there is no qualification for a DMP.
Should I consider debt settlement?
Some creditors will not even discuss settlement arrangements on any account that has not yet reached a charge-off status (I9, R9 or O9). On a scale of 1 to 9 with 1 being positive and 9 being negative, you might have to have negative credit to even begin negotiations for settlement. These ratings can remain a part of your credit file for up to 7 years from the date of last activity, depending on your location. Your employment, living situation and other obligations may make the fall out of a settlement not be worth the money written off.