Getting control of debt is seen as an arduous process fraught with hazards. It can lead to a renewed disaster if used inappropriately. A debtor has three paths open to him. He can file for bankruptcy protection under Chapter 7 or Chapter 13 of United States Code, Title 11, he can apply for a debt consolidation loan, or he can go through credit counseling.
What Is Credit Counseling?
Consumers who have gotten themselves into trouble with debt often need re-education about how to avoid unsustainable debts in the future. This process is called credit counseling. A credit counselor looks at a debtor’s entire financial picture, taking into account all of their assets, income and debts. The purpose of credit counseling is to help the debtor avoid bankruptcy. Some counseling services also negotiate with creditors on the debtor’s behalf.
Debt Consolidation
Debt consolidation is the process of consolidating all outstanding debts into a single loan. The consolidation itself involves taking out a new loan, using it to pay off the other debts, and finally paying off the consolidation loan. The ability to pay creditors a lump sum is a great tool for negotiating. Creditors may be willing to lower the amounts owed when they know the debtor can pay them all immediately.
Downsides
Unfortunately, debt consolidation can only work if the borrower has good credit and has not defaulted on any loans. If this is not the case, the interest rate will probably be too high to do the borrower any good. An added disadvantage is that the length of repayment can mean that the money used to pay off the loan will be greater than the debts were. The length of time adds to the total amount of money already spent paying off the debts and is now being spent paying off the consolidation loan.
What A Credit Counselor Can Do
A good credit counselor can negotiate with creditors to lower interest rates, reduce amounts owed and even forgive some debts altogether. A repayment plan will be created. The downside is as each account is paid off, the credit counselor will usually recommend that the account be closed. Closing multiple accounts in this manner hurts the debtor’s credit score.
Closing the accounts must be weighed against the consequences of leaving them open, especially if the debtor is already delinquent or in default. In this case, the debtor’s credit report is being harmed anyway, and closing the accounts after paying them off is the lesser of two evils. Credit counseling can help repair credit faster and cost less money than consolidating debt. The debtor himself must weigh the two options as both may make sense in different circumstances. Debt consolidation spares his credit but takes more income, and credit counseling can harm his credit, but his income may remain untouched.
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