Troublesome debtors are often drawn by debt consolidation options that offer a way to deal with debts. Before a wise decision can be made, whether or not to consolidate and with which company, some key issues have to be looked at.
Debt consolidation companies might offer debtors lower monthly payments. However, the debtor should analyze the real cost of the consolidated loan. Even though the payments may be lower they are stretched out for a longer period of time and the debtor might end up paying the loan at a much higher interest rate than the original debt. There might also be hidden fees within the consolidated plan that cannot be easily seen.
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Furthermore, debt consolidation hurts the debtor's credit score and may make debtor's future borrowing more expensive. Settlements Plan is one form of debt consolidation that allows the debtor to pay only a portion of their debts to the creditors. Such method of debt consolidation deteriorates credit score much more than mere Debt Management Plan, which pays the full loan amount over an extended period of time. Settlements Plan also brings in the Forgiveness Tax, which taxes the debtor on the discharged debt as if it was income received by the debtor.
An alternative to debt consolidation might be a home equity loan, which runs at a lower interest rate than other loans and the interest on the loan may also be fully tax deductible. However, such loans should only be used if the debtor is certain that a bankruptcy will not be filed in the future. Converting unsecured debt to a home equity loan takes away the debtor's option of using bankruptcy to discharge these loans. The home equity loan also takes away the debtor's right to use the homestead exemption to protect his house from foreclosure.
Sometimes the best option for the debtor is to call the creditors and negotiate reasonable terms themselves. Calling credit cards and asking for a lower interest rate might be one of the best solutions.
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