Debt Consolidation: Tips for Getting Out of Debt

Several debt consolidation options exist including debt consolidation loans, debt settlement, bankruptcy and credit counseling. It is best to determine which option is best suited for your financial needs and to understand any associated risks.

Debt consolidation loans are one of the most popular choices for individuals who own real estate with accrued equity. Homeowners take out a second mortgage or refinance their home loan using home equity as collateral. Home equity loans can be used to pay outstanding credit card debts, unsecured personal loan, student loans or medical expense.

When borrowers consolidate unsecured debt into a home equity loan they are placing their home at risk. Careful consideration should be given to this get-out-of-debt option. Most home equity loans are repaid over a period of ten to fifteen years, while unsecured loans are repaid over three to five years. Although interest rates charged on home equity loans is considerably lower than that of credit card companies and other creditors, debtors extend the repayment of debt by seven to ten years.

Home equity loans are secured by your residence. Should you become delinquent on the second mortgage, your lender can commence with foreclosure proceedings. Extreme caution should be used when using your home to repay creditor debts.

Debt settlement requires debtors to negotiate with creditors to reduce the balance owed. In some cases, debt settlement can be negotiated by the debtor. However, most consumers require assistance from a professional debt settlement company or lawyer.

The primary objective of debt settlement is to reduce the amount of debt by offering lump sum cash payment. When properly orchestrated, debt settlement can reduce debt by up to 50-percent.

Many credit card companies do not engage in debt settlement. In some cases, creditors can resist negotiations and proceed with collection actions when debtors are unable to pay the full amount owed. When debtors are in serious financial trouble, credit card companies prefer to receive something vs. nothing. If you are considering filing bankruptcy to eliminate credit card debt, debt settlement might be an option worth exploring. Otherwise, other debt management options will need to be explored.

Credit counseling provides debtors the opportunity to thoroughly explore their financial situation. Credit counselors are trained to assess debtors' financial status, offer advice and assist in creditor negotiations.

Reputable credit counseling agencies are well-connected within the credit industry and can help debtors' obtain reduced interest rates or re-age past due accounts to improve credit ratings.

Two types of credit counseling agencies exist. Non-profit credit counselors charge fees based on a sliding scale factor. For-profit credit counseling agencies charge a start-up fee and a monthly service fee which is payable until outstanding debts are repaid.

It is crucial to conduct research when selecting a debt consolidation company. Check with the Better Business Bureau to ensure you are working with a reputable organization. Conduct research online by typing in the company's name to determine if complaints have been filed. Engaging in due diligence can prevent you from being scammed or losing money to a debt consolidation company who is unable to deliver on their promise.