Handling your debt

On the road to repairing your credit you must first decide what options are best for you to deal with your debt. Is it a manageable amount of debt? Is it in collections?

There are many choices available to you, it’s finding the solution that will work best for you. The best solution gives you the best chance of success at handling your debt load. 

Debt Consolidation

Debt consolidation is when you take a loan though a financial institution to pay off outstanding debts. This is most commonly a second mortgage or a line of credit where you are using your home as collateral for the loan. It is an opportunity to pay off several loans and have one payment at an optimal interest rate.

This is a good option if managed affectively but even consolidation loans can begin to add up. If you are using this loan to pay off credit card debts then optimally you would then close those accounts once paid for.

Leaving these credit cards active can result racking up those bills once again and you are back to square one only now you also have the consolidation loan to deal with and the risk to your home that you used as collateral. If managed properly a debt consolidation can save you money and help to get back on track. 

Debt Management Plans (DMP)

A debt management plan should only be an option after careful scrutiny over your finances by a certified credit counselor. Although they can be a good tool for getting your debt under control they quickly become a complicated risk if mismanaged.

In a DMP, your credit counseling agency sets up an account that you make steady installments into according to the careful budget that they have set you up with. From there they make regular payments to the creditors that you are owing to.

The counseling agency needs to make careful arrangements with the creditors to confirm a timeline that they have to pay out your debts and can often lower your interest rates on them. This option, if managed properly, can be a solution for anyone who is struggling to get control of the finances and is facing a large debt. 

Bankruptcy

Bankruptcy is a last resort option for debt management. In bankruptcy you have a court order releasing you from your debts. Unfortunately it will be recorded on your credit report for 10 years and can ultimately make it near impossible to secure financing for a mortgage, a car, student loans or even to obtain life insurance.  

There are two main types of bankruptcy.  In a Chapter 13 you can still hold onto mortgaged homes or sometimes vehicles if you have steady employment and will follow a court approved plan for dept repayment over a three-five year plan.

In chapter seven all assets are liquidated to go towards the debts acquired. Although both types have a devastating affect on your credit report they offer a clean slate to people recovering from overwhelming debt.