7. There Are Pros and Cons to Consolidation Loans
With a consolidation loan, you use a home equity line of credit -- or get a second mortgage -- to pay off your unsecured debt. Essentially, you consolidate all of your debt into one big loan secured by your home. There are pros and cons to this option.
Pros. Often, interest rates on loans secured by your home are lower than those charged by credit card companies. In addition, there may be tax advantages to having your debt in a home equity line or second mortgage. (To learn more about the tax advantages of home loans, see Nolo's article Homeowner Tax Deductions.)
Cons. On the other hand, the consequences are great if you cannot pay the consolidation loan -- you risk losing your home to foreclosure. Also, the costs associated with obtaining the new loan (such as points and fees) can be quite high, and the repayment terms may not be favorable.
The bottom line. Consider the consolidation loan option very carefully. Talk to a tax expert to determine how much money you will actually save, and remember that if you default on the loan you could lose your home.
8. Bankruptcy Might Be a Good Option
Bankruptcy is an affordable and surprisingly easy federal court remedy that frequently allows debtors to get rid of their debt and start over without paying anything back. Bankruptcies can generally be described as "liquidation" (Chapter 7) or "reorganization" (Chapter 13). Under a Chapter 7 bankruptcy, you ask the bankruptcy court to wipe out (discharge) the debts you owe. But keep in mind that not all debts are dischargeable and not everyone qualifies to file for Chapter 7. Under a Chapter 13 bankruptcy, you file a plan with the bankruptcy court detailing how you will repay your creditors. You must repay some debts in full; other debts may be repaid only partially or not at all, depending on what you can afford. If you are inclined to pay some or all of your debt back, Chapter 13 bankruptcy may be a better approach to managing debt than a DMP or debt consolidation plan. To learn more about Chapter 7 and Chapter 13 bankruptcy, see Nolo's Bankruptcy topic.
For help in choosing a good bankruptcy attorney who can explain your debt relief options, go to Nolo's Lawyer Directory to see a list of bankruptcy attorneys in your geographical area.
9. There Are Limits on What Debt Collectors Can Do and Say
If you haven't paid your bills for some time, the creditor may turn your account over to a collection agency. If you don't plan to file for bankruptcy and aren't judgment-proof (that is, you don't have income or property), then it's often best to communicate with these agencies.
However, there are times when debt collectors cross the line and engage in annoying, abusive, or even fraudulent behavior. If this happens, it's important to know your rights. A federal law called the Fair Debt Collection Practices Act (FDCPA) limits collection agencies from engaging in certain activities, including:
- contacting you at unreasonable times
- harassing you
- using abusive language
- making false or misleading statements, and
- adding unauthorized charges to your account.
Many states also provide similar protections to consumers. If you think a collection agency has broken the law, document the behavior (save letters and voicemail messages, for example) and ask the agency to stop. If the harassing continues, you can file a complaint with a consumer protection agency and even sue the agency for damages. (To learn more about dealing with collection agencies and what to do if they cross the line, see Nolo's Debt and Collection Agencies topic.)
10.Credit Repair Clinics Aren't Worth the Money
If you want to clean up your credit file, steer clear of credit repair clinics. These companies claim they can fix your credit, qualify you for a loan, or get you a credit card. But you shouldn't have to pay for these services: These companies can only legally do the same things you can easily do yourself. And some of these companies use questionable tactics that can land you in hot water. (For information on how to clean up your credit report and rebuild your credit, see Nolo's Credit Repair for Bad Credit topic.)
For a comprehensive guide on dealing with financial problems, including how to prioritize debts, budget your money, negotiate with creditors, avoid foreclosure, and more, get Solve Your Money Troubles: Debt, Credit & Bankruptcy, by Robin Leonard and Margaret Reiter (Nolo).
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