Bankruptcy Alternatives: Debt Consolidation

Debt consolidation isn’t for everyone, but if your credit is still in pretty good shape, you earn a good income and/or have accumulated some equity in your home debt consolidation may work for you.

Simply put, debt consolidation is a matter of applying for a loan or line of credit that is large enough to allow you to repay all of your existing debts.

The advantages of debt consolidation include a simplified payment plan (you only have one monthly payment to worry about), reduced interest (the loan will almost certainly charge lower interest than your credit cards), and improved cash flow (your total payment may be hundreds of dollars lower than all of your old payments).

The problem with debt consolidation loans – they can be difficult to obtain. Think about it from the bank’s point of view. Let’s say you owe $25,000 on 4 different credit cards and you have a personal loan for $15,000 more. Before you consolidate you might owe 5 different companies. After you consolidate you will only owe 1. Unless your credit history is quite good and you earn a good income, a bank may not want to risk lending you all of that money themselves. Even though it might be better for you and make it easier for you to repay the debt, the bank might still refuse you simply because they don’t want to take the risk. Something about “all of their eggs in one basket…”

If you haven’t discussed the prospects of a consolidation loan with your bank you probably should – even if you think they will turn you down. Your banker will be able to help you analyze your current situation and they can tell you whether or not there are things on your credit bureau keeping you from being approved for the loan that perhaps you don’t know about.

If the bank has turned you down (or you are certain they will so you don’t won’t to bother even asking) it’s time to consider the next alternative to bankruptcy. It’s called credit counseling.

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