Debt Consolidation - Good or Bad Idea?

Question

My mother is over $20,000 in debt due to impulse buys and necessary home repairs. She has 3 credit cards and had things paid off or nearly so until the repairs came up. She owns her own home but may lose it due to the debt.

What are the pros and cons of debt consolidation? Which places are legitimate if we decide to go that route? (I'm helping her look into various avenues.) Do they charge for their sevices or are they free? How do they work?

Any tips on preventing this kind of thing from happening in the future? She does cancel cards as she gets them paid off since she doesn't want to be more in debt.

The mortgage on the house was paid off last year. It is the home repairs made since then and a buyout of one of the credit card companies by another bank that has her in financial straits. She has been paying above the minimum amount owed on all 3 cards for some time trying to get them paid down.

Answer 1

I know someone in similar circumstances. What she did was to call up the banks and arrange a meeting with all the different banks' representatives. During the meeting, present your side of story (it helps if there is someone alongside your mum during the meeting), show them your income documents and explain why you cannot pay them what they require from you - because a person still need to pay for groceries afterall.

There are 3 things that can be negotiated to your favor.
1) The past interest charged to you. This can be discounted depending on the bank's policies.
2) The future interest charged to you. Most banks can give you a lower interest or even 0% for a limited period of the next 6 months or 1 year.
3) The monthly repayment amount. Explain what is a comfortable amount you can offer to pay them per month and always highlight that you are servicing the payments to various banks all at the same time. Ask them to re-work on your monthly installment amount based on what you offer. Most times, they can fix it at say for example $100 for the next 12 months with the option of a gradual increment to $150 afterwards.

Most importantly, display your sincerity of your willingness to pay. Explain that you do not want to default totally thats why you are hoping that they can help you with your financial situation. Always negotiate.

Good luck.

Answer 2

The biggest disadvantage of debt consolidation is that it might appear on your credit as a bankruptcy. Also, most of the companies out there are disreputable and are just doing what you could be doing yourself without dinging your credit and paying fees - i.e. working out payments and making arrangements with your debtors.

However, your mother CAN go to a Consumer Credit Counseling agency (non-profit) and get advice without hurting her credit record.

Do not get a home equity loan or go into more debt to try to pay off the cards. This is robbing peter to pay paul and will just worsen her situation!

The mortgage is the MOST important thing right now so forget about the credit cards for a while. Yes, even if she can't make payments. Just call the companies and tell them she is going through a hardship and can't make payments, or ask if she can send a small token amount each month.

After she gets the mortgage current, then start working on the credit cards again. She might even be able to work out a settlement or two.

Answer 3

Beware of debt consolidation companies. Many of them are complete frauds that may result in your moth losing her house. Your first step is to go to the bank and see if you can negotiate a home equity loan. Use the money to pay off the credit cards and then cut them in half. Credit cards are convenient, but people how use them to spend more money than they can pay at the end of each month should not have them. They are the worst type of loans in existence.

An alternative is to call the credit card companies and negotiate a lower interest rate and a repayment schedule.

There are also public services that may help. Someone else answering your question may be able to lead you to them. I don't know anything about these services, but there are web sites that can help answer some of your questions.

Answer 4

1st thing she needs to do is get advice from her bank......they will not charge and if it is one of the main banks they will always give best advice as they have liicences that they can lose. I work in banking and deal with the exact problem you are refering to for many of my customers. your mothers bank will probably give her a good rate on the loan as they will base it not only on credit checking but her profile at the bank. meaning that if she has always ran her account well, not borrowing money or using an overdraft without permission regularly etc then they will base there decision more on that. Generally though, she would be silly not to reconsolidate and take a unsecured loan, (unsecured meaning that she does not need to put her house up as security if it goes wrong). credit cards and store cards are usually very high interest, for example 15% - 31% loans are often under 10%.

example: if she had a credit card at 21% with 20,000 outstanding and she made min payment of £100/month then she is only paying off the interest and it would actually take about 40 years to clear card entirely. (and that is assuming she NEVER made another purchase on card). With a loan at a good rate there will be a set amount per month to pay and a set time frame, say 7 years and then it would be completely cleared and she would be debt free.

It is very important that she gets rid of the credit cards asap. if she does not then she will more than likely add to the debt in the future......and it sounds like she is at her limit now.

If her bank cannot help her or give her a reasonable rate loan then go to big name reputable comapnies only, try and avoid the ones that specialize in debt consolidation or advertise mainly to people who find it hard ot get credit as there rates are usually very high as they are last resorts for many people.

also tell her to avoid insolvency this is a form of bankruptcy and she will probably lose her house. teh adverts on tv that talk about negotiating with your credit card people are also insolvency companies.

long and short, definatley get her to consolidate. go to big companies only, ideally her own bank 1st and get rid of all other credit cards, store cards and hire purchase etc etc etc.

wish you an dyour mum best of luck getting out of this and i hope this helped.

:o)

Answer 5

Opt for a debt consolidation loan: The easiest method of getting a debt consolidation loan is to utilize the equity of your home. Equity of your home is calculated and determined by the difference in the amount you have paid and the amount you owe. If the amount you have paid is more than the amount due, you can use it as collateral. This allows you to borrow money on lower interest rates. Besides, you also get tax benefit on this type of loan. Consult your tax advisor before opting for this loan.
http://debt-trap.com/category/Debt-Consolidation-Basics.html

Answer 6

You can work with the law office and get a payment plan. If the first person says no, ask for a supervisor. Just tell them you don't have the money and will need to pay it off at the rate of $XXX per month. Also push to have no interest added and you will get a delete letter at the end of that time. Ignoring creditors is never smart, as you now know. It's all about communication....

Answer 7

first, do not sign up for debt consolidation that is offered over the internet or the newspaper or even television..I went through debt consolidation but i used a non-profit agency here in the seattle area..the first thing they do is have you cut up your cards..then they negotiate with your creditors to get a plan in place depending on your income and ability to repay..I was charged $5.00 a week, and I was completely out of debt in 13 months without sacrificing too much of my income..well worth it...look in your local phone book for a local NON-PROFIT agency and give them a call to set up an appointment..I wouldn't wait too long...Good luck to your mother..

Answer 8

read creditinfocenter.com

she should go to her local bank and see if they can help with a home loan or line of credit.