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Is debt consolidation an option before bankruptcy?

Declaring bankruptcy is scary. Are there alternatives to try before you take such a step? One option is to try debt consolidation.

Debt consolidation is a way for you to gather your debts and address them. You need to weight the benefit of avoiding bankruptcy against the discipline and additional costs necessary for you to try debt consolidation.

Debt consolidation programs

In addition to combining your debts into one payment, many debt management programs are accompanied by credit counseling to help you learn how to manage your expenses. This is good because if you don’t decrease your spending, you’re going to end up with the same problems.

Debt management programs often take up to five years to eliminate your debt. That’s five years of interest payments added on to your current debt. They often charge a fee as well.

You may be tempted to move your credit card debt onto zero-interest credit cards. Before you do, check to see if there is a transfer fee – sometimes up to 3 percent – as well as an expiration on the zero-percent interest rate – usually between one year to 18 months. If you’re not able to pay off your debt within that year, your payments could become larger than they are now.

Qualifying for a personal loan can by difficult with a low credit score, and if you are carrying a lot of debt you likely have a low credit score. Banks or other lenders will also want collateral such as a house or car. Some loans also include origination fees or a pre-payment penalty.

Home equity loans include application fees and closing costs as well as requiring you to put your house up as collateral.

A credit counseling agency can help you manage your debt and provide education and counseling. Some nonprofit organizations will offer their help at low or no cost to you. If you find such an organization, make sure:

  • The counselors are qualified
  • You understand what services are being offered
  • All fees are discussed up front
  • You read any contract before you sign it

Consider each of these options carefully. Each require years before you pay off the debt and include extra debt just to use them.

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