Debt consolidation is a means of managing existing debt when it becomes overwhelming for the debtor. There are a number of ways this can be achieved, with each having a different effect on your credit. Understanding the impacts is important, as you do not want to consolidate your debts only to end up in the same position further down the road.
Perhaps the most obvious type of debt consolidation is through securing another loan to pay off your existing creditors. The problem with this method is it is often difficult to find agreeable terms, prompting many debtors to take out loans with significantly higher interest rates than traditional loans. However, there are often benefits to consolidating debts in this way, especially if you use the loan to pay off credit cards that are nearing their credit limit. So long as you keep up repayments on the loan, you credit will slowly recover and put you back in good standing.
Credit counseling agencies provide debt management plans (DMPs) which are designed to allow the debtor to pay a consolidated amount to the counseling agency. This payment is typically at a reduced rate and gives you breathing space when making payments to creditors. Unfortunately, paying through a DMP may actually have a negative effect on your credit, even when you have been on time with previous payments. This is due to the fact that creditors may make the fair assumption you are currently experiencing financial difficulties. These types of plans typically only apply to unsecured debts, and creditors are not required to accept a DMP.
Credit Card Transfers
Credit cards with lower rates may provide you with the ability to transfer the balance of existing cards. This method of consolidation is best suited to debtors who are fiscally disciplined when it comes to shopping for opportunities for lower rates. You also need to be careful how you use the new cards, as consolidating other balances or spending heavily will likely result in your credit taking a dip. Always check the small print and ensure you fully understand the terms of the rates you are signing up for.
Filing for Bankruptcy
If the money you owe is so staggering that typical debt consolidation methods are not an option, you may want to consider filing for bankruptcy. There is an adverse effect on credit from filing for bankruptcy for a time. However, when you are in a significant amount of debt, your primary concern should be paying your creditors what you can afford in order to get back to a level playing field from a financial point of view.
If you decide filing for bankruptcy may be the best choice for you, speaking to a qualified bankruptcy lawyer will help you navigate through your options and the process involved. Contact H. Lehman Franklin for a consultation of you would like to learn more about debt consolidation versus filing for Chapter 7 or 13 bankruptcies. We have over 30 years of experience in handling bankruptcy cases for clients from across the great state of Georgia.