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b) EQUITY - Another variation of"debt consolidation" is based on your ownership of real estate. If your home is worth more than you paid for it, you have equity, and many banks will gladly lend you money against it (assuming your credit report looks good enough). There is little risk to the lender, because if you default, they can force a foreclosure on your property to recover their money.

So, let's say you have $25,000 equity in your house, and you find a bank willing to loan you $25,000 with your house as collateral. This is the ever-popular "second mortgage" or "equity line of credit." You then pay off your credit cards. At this point in the program, things can go well or not so well. If you are a very disciplined person financially, and your hardship situation was temporary, you may emerge from the scenario with your credit intact. You still have the same level of overall debt, but it is structured in a way that you can live with.

Many people, however, find that they end up in worse shape using this approach. Why? Because they suddenly have $25,000 worth of credit available with new offers for credit cards coming in the daily mail. Then they get busy planning for the holidays, or they just have to buy that awesome home theater system for $3,500. Before they know it, they owe $10,000, $15,000, or even $25,000 again on those pesky credit cards, PLUS, they have the second mortgage to keep up. The result is disaster.

There's also another big problem with borrowing against your equity: you're essentially trading an unsecured debt for a secured debt. If you default on a credit card balance, the creditor (if you ignore the problem long enough) can sue you and obtain a court judgment. Then they can put a lien against your house, so that if you ever sell the house, you're forced to hand over the money. But they cannot force the sale of your house. A secured debt is a far more serious matter, because you've pledged your house as collateral. If you default on a debt that has been secured by your house, you risk losing that home.

Why trade unsecured debts for secured debts? For most people, this is not the best move to make. Yet countless individuals fall for this trap annually.

C) CREDIT COUNSELING - The third variation on "debt consolidation" is not really consolidation in the true sense of the words, as described above. Instead, you are enrolled into a Consumer Credit Counseling program. You meet with a counselor who analyzes your monthly budget. The counselor then makes contact with your creditors and attempts to get them to lower the interest rate temporarily. You make one monthly payment to the counseling agency, which then disburses the funds to your various creditors.

The theory here is that your overall payment per month is lower due to the counselor's success at obtaining lower interest rates and more favorable terms with the credit card banks. This approach is the one most often recommended by the banks themselves, and in the financial press Credit Counseling is touted as the cure-all for debtors who are in over their heads.

So, does this really work? Well, maybe yes, more likely no, depending on your situation. First, you have to understand that the counseling service, while in theory a non-profit organization, actually receives compensation from the bank you owe the money to. So, whose side are they really on - the side of the consumer who's paying a monthly $20 administrative fee, or the bank that's paying 7% of the restructured debt? You don't need to be a genius to figure out that the CCCS program won't work for a lot of people.

Second, most credit counselors are not going to work all that hard at getting an uncooperative bank to cooperate. The net result is that they simple enter into the typical hardship program that you could have easily negotiated for yourself without the extra fees.

Third, with a CCCS program, the most frequent complaint we've heard from ex-participants is that they have little or no insight into what the CCCS agency is doing on their behalf, and they have virtually no control over the process. They send in their single monthly payment, with no idea of how much is going to which creditor, and since most counselors are busy people who work based on high volume, getting a return phone call can be difficult.

Now, I'm not saying that all CCCS organizations do a poor or lackluster job. Like any business, there are good and bad services out there. However, they don't really SOLVE the problem at all. In other words, if you walk into the office of a credit counselor owing $25,000, you'll still owe $25,000 when you walk out.

One thing that a counseling agency can do is to GET THE PHONE TO STOP RINGING. This can indeed be a lifesaver, if you are already getting collection calls and the banks are starting to make your life miserable. But in our judgment, credit counseling is a helpful approach only for the consumer who knows that their financial hardship is temporary (say six months or less) and simply does not want to deal with the hassle of handling the phone calls in the meantime. Otherwise, stronger medicine makes more sense.

d) CHAPTER 13 -The final form of "debt consolidation" is actually not consolidation at all, but rather a form of bankruptcy called "Chapter 13." We'll discuss it on the next page under its proper heading. Be forewarned, however, that many (if not most) of the ads you'll see for "debt relief' or "debt consolidation" are really attorneys advertising to take you through a formal declaration of bankruptcy. Watch out!

Continued: Bankruptcy: A Must To Avoid!

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