A credit counseling company can help develop a debt management plan (DMP). The plan will help you manage your income and expenses and determine how much you can pay down your balances on a monthly basis. Credit counselors can often negotiate with your creditors to reduce your interest rate, remove late fees and other penalties in order to help you pay down the principle balance. Clients then pay one payment, which is then distributed to each of their creditors according to the debt management plan.
To be eligible for most credit counseling programs you must have open accounts that are current. If you are not current, you may be required to get current before beginning the plan.
While a consumer is in a credit counseling program your creditors may report that you are in a program. Underwriters may see this reporting as a sign of trouble and refuse to extend new credit terms, so apply and qualifying for new credit may be difficult. It isn’t as bad as a derogatory listing (charge-off, collection account or a bankruptcy). You will not be able to use the credit accounts included in the program as you pay down the principle balances.
Debt consolidation is taking one loan to repay or pay-off others. This is done to secure a lower interest rate, a fixed interest rate or for the convenience of have one loan. More often than not the unsecured loans are changed to secured loans collateralized by assets. The asset is normally the borrowers home. Collateralizing the loan typically allows for a lower interest rate because the risk to the lender is reduced.
The only drawback for most consolidation loans is the repayment is often lumped in with mortgage payments over a very long period of time. While interest rates are typically reduced and monthly payments lowered, the length of payments may result in it costing you significantly more to pay down the same debt.
Personal bankruptcy allows an individual to declare bankruptcy, provided they meet the requirements. Individuals seeking relief under the Bankruptcy Code may file a petition for relief under a number of different chapters. Chapter 7 is the most common and it involves liquidation of non-exempt property to be sold with proceeds distributed to creditors. Chapter 13 is more complex, but it allows debtors to keep some or all of their property while future earnings are used to pay creditors.
Consult a bankruptcy attorney in your area for more information about bankruptcy and how it applies to your situation.
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