Tips For Choosing The Best Debt Plan

There are several types of debt consolidation options; each with its own set of pros and cons. Some of the most common include debt consolidation loans, debt settlement, credit counseling and bankruptcy. It is important to determine which type of debt consolidation plan is best suited for your needs and understand the associated risks.

Debt consolidation loans are usually home equity loans. This type of financing requires the homeowner to obtain a second mortgage note using the equity in their home as collateral. Consolidation loans can be used to pay off outstanding credit card balances, personal and student loans, and other types of unsecured debts.

Debtors transfer their debts into the home equity loan. Instead of making monthly payments to several creditors, one large payment is made to the debt consolidation lender. While this may appear to be a good solution, unsecured loans converted to a home equity loan might cause more problems than it solves.

First and foremost, the equity in your home is depleted to pay for unsecured loans. Through refinancing debts and transferring them into one loan, repayment terms are extended, increasing the amount of time required to pay off debts.

Home equity loans are generally repaid over a period of 10 to 15 years, whereas unsecured loans are repaid over 3 to 5 years. The additional interest can add up to a considerable chunk of change.

Secondly, home equity loans are secured by your home. If you become delinquent on the second mortgage, the lender can initiate foreclosure. Careful consideration should be given before placing your home on the line to repay creditors.

Debt settlement involves negotiating with creditors to accept a lesser amount than is owed. In some instances, debt settlement can be negotiated by the debtor. However, the majority of consumers require the assistance of a professional debt settlement company or attorney.

The objective of debt settlement is to slash the debt owed by offering an upfront lump sum payment. Also known as debt arbitration, debt settlement can reduce outstanding debt balances up to 50-percent.

Keep in mind credit card companies do not like debt settlement. In some instances, creditors can resist all negotiations and initiate a lawsuit against you if you are unable to pay the full amount. However, if you are in deep financial trouble credit card companies generally prefer to receive something vs. nothing. If you are at the bankruptcy-point, debt settlement might be an avenue worth exploring. Otherwise, consider credit counseling or other debt management options.

Credit counseling provides debtors with the opportunity to thoroughly review their financial situation. Credit counselors can assess the debtor?s financial status, offer advice and assist in creditor negotiations. Reputable credit counseling services are connected within the credit industry and can sometimes help debtor?s obtain lower interest rates or re-age past due accounts to improve credit ratings.

Two types of credit counseling agencies exist ? non-profit and for-profit. Non-profit agencies typically charge fees based on a sliding scale factor. For-profit credit counselors typically charge a start-up fee and monthly fee which is payable until outstanding debts are paid in full.

It is imperative to conduct research when selecting any debt consolidation company. Be certain you are working with a reputable organization in good standing with the Better Business Bureau. The Internet is a great resource for checking credentials and locating complaints. Engaging in due diligence can prevent you from spending your hard earned money on a bogus company that cannot deliver what they promise.

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