Are you unsure if you should declare bankruptcy or go the debt consolidation route? Follow these easy steps to see which option works best for you.
First, give yourself a reality check:
- Have your credit cards reached their credit limit?
- Do you pay only the minimum or less on any of your credit cards each month?
- Do you juggle other bills to make the minimum payment on credit cards?
- In the last year, have you gotten a payday loan?
- Have you been paying late fees on overdue credit or store card bills?
- Do you use cash advances from one credit card to make payments on another?
- Has a collection agency contacted you about an unpaid debt?
- Have you recently received a court notice, or a letter about bailiffs or a sheriff coming to your home?
If you have answered yes to any of these questions, it’s time to proceed to:
Step One: Considering Debt Consolidation
What Is Debt Consolidation?
Debt consolidation is getting a single loan to replace many unsecured debts, such as credit card balances. For example, if you owe money on a line of credit, four credit cards, and a finance company loan, you can get a debt consolidation loan to repay all of your debts, so that you only have one payment instead of six payments each month.
Do I Qualify for a Debt Consolidation Loan?
In order to qualify, you must:
- Give the bank a copy of your monthly budget. This is to prove that you have the ability to make payments;
- You must have a stable source of income, such as employment wages;
- You may require a co-signer or collateral;
- If you have poor credit, a co-signer will probably be required. Asking someone to co-sign for you is a difficult decision and should not be taken lightly, as any non-payment by you will directly affect your co-signer’s credit score.
As a general rule, if you can afford to repay all of your debts over a three to five year period or less, then a debt consolidation loan is probably the correct option for you. If you don’t qualify for a debt consolidation loan, then you should proceed to:
Step Two: Credit Counseling
What Is Credit Counseling?
Credit counseling is a professional service from a credit counseling agency. They provide two main services:
- Education on personal management of finances and credit, including credit cards;
- Debt management plans, in which an arrangement is made by a credit counselor between you and your creditors. You make a single monthly payment and the counselor makes payments to the creditors.
For example, if you owe $20,000 to five different credit card companies, the credit counselor would create a debt management program for you where you pay the credit counselor, say, $500 per month. The money is distributed to your creditors and over a 40 month period all of your debts are paid off.
If you don’t qualify for credit counseling, you should proceed to:
Step Three: Bankruptcy
What Is Bankruptcy?
Bankruptcy is a way for people who have more debts than they can handle, either to work out a plan to repay the money they owe over time, or to eliminate their debts entirely.
A plan to repay some or all of the money owed over a period of time is called a Chapter 13 plan.
If payments cannot be paid over time, an individual can file a bankruptcy under Chapter 7, where assets are liquidated and most debts are discharged.
Whichever chapter you choose, note these key facts:
- Bankruptcy is complicated, with local variations in the laws. It is important to consult a bankruptcy lawyer before you file;
- Before you file for bankruptcy, and again before your Chapter 13 bankruptcy is finally discharged, you much obtain credit counseling from a non-profit credit counseling agency.