Debt Consolidation: The Scare Tactics

No matter what they say, creditors can only do so much. Of course, they want you to do what they want. That doesn't mean you have to. What they can or can't do is determined by law. Debt consolidation is not one of their options. Maybe yours, but not theirs.

Debt consolidation loans have become very popular in recent years. They combine payments (so that you aren't dealing with twenty bills each month) and MIGHT get you a lower interest rate. Credit card companies, the people charging you thirty percent interest in the first place, have gotten into the act recently. If you're behind on a credit card, you may get a phone call for a debt consolidation loan from a company owned by GMAC, Countrywide or whomever else you owe money to.

Your creditors can't throw you in jail. At least in America having debts isn't a crime. A national pastime possibly, but not a crime. If you did something illegal to get the loan, then you might have a problem. Your creditor may try to talk you into debt consolidation with them, but they can't send you to jail for refusing.

So what can your creditor do? It depends what state you're in. Since they have a pre-existing business relationship with you the debt consolidation company that they own can call you, even if you're on the national do not call list. For the creditor, debt consolidation with them is a plus. They get paid, don't have to deal with a collection and can sell the debt consolidation loan to somebody else. This makes you somebody else's problem.

If you don't want, or can't qualify for debt consolidation, your creditor has a couple options. Most likely they will report you to a credit bureau. This is cheap to do and hopefully you'll pay them if you try to repair your credit score. If you are planning on debt consolidation, consolidate before a creditor reports you. Secondly, they can try to repossess your property. Finally, they can take you to court and get a judgment against you.

Loans come in two general types, secured and unsecured. On a secured loan you put up something of yours that the creditor can take if you don't pay. On an unsecured loan you don't. This is why debt consolidation loans can have a lower interest rate than your credit card. An asset, normally your house which can be taken, backs the debt consolidation loan. And that's usually worth far more than the loan. What it takes to foreclose on or repossess your property depends on the state.

All of the other options eventually end with you in court. Once the lender has the judgment, they have some options. They can have the sheriff come and take your property for sale. They can garnish your wages (up to a certain percent). They can record the judgment at the courthouse so that it has to get paid if you want to buy real estate. At this point bankruptcy may be a better option than debt consolidation.

Preparing For Debt Consolidation

Before you go through a debt consolidation, you should prepare. This will lower costs and help you make the most of your debt consolidation loan. Your first step should be to find someone to help you. If you keep doing what you were doing, you will keep getting into debt.

A certified credit counselor from the National Foundation for Credit Counseling (little or no cost) or a Christian financial advisor from Crown Ministries (they're free) will help you with a personal plan. This plan may or may not include debt consolidation but it will include budgeting and saving. Imagine not living paycheck-to-paycheck. It can happen to you.

Once you have a basic outline of what your expenses are it's time to hack-and-slash. This means to eliminate the bills that you don't need (you signed up for it when you weren't thinking) and payoff the little stuff. First, take a look at your monthly bills. Is there something you don't need? Like a newspaper subscription you don't read or yard service? If so, that can go!

You will be surprised how much you can eliminate by being very honest about the difference between want and need. Cable is a great example. For $50 a month or so you can get a great selection of entertainment. For $12 a month you get local channels. Not as much fun, but you get the major new shows and news. Turn up the thermostat by a few degrees and turn on the fans. Use your creativity. If it can go, cut it. You can always add it back later. That's the hack part.

The slash part comes when you eliminate those little debts before debt consolidation. You do not want to spend the next ten years paying for that fuzzy golf hat. So pay the minimums on the big debts while you payoff the small ones before debt consolidation.

Once hack-and-slash is done, you should be left with your necessary bills and the medium and large debts. What is a medium debt? A medium debt is a debt that you could payoff in a year, with work. The dollar amount depends on your income and debt level. This is where you and your credit counselor have to make a decision before debt consolidation.

Do you try to payoff the medium debts or include them with your debt consolidation? If you have only one, and your situation isn't desperate anymore, pay it off before debt consolidation. If you have more than five, you should probably consider including them with your debt consolidation. If you have 2-4, you and your credit counselor need to make a decision. Perhaps payoff one over a year, one at tax time and include the rest in the debt consolidation.

When you are only left with large debts and necessary bills, you are ready for debt consolidation. Your certified credit counselor, who has been at your side so far, will walk you through the next stage on the road to financial freedom.