Business Banking Restructuring

Debt Consolidation

Get a loan and use it to pay off all your other debts, then make one monthly payment to your new lender. Ideal right? The problem is, the more you need a consolidation loan, the harder it is to get one. Many banks don’t even make small unsecured consolidation loans anymore.

Debt consolidation is nothing more than a “con” because you think you’ve done something about the debt problem. The debt is still there, as are the habits that caused it — you just moved it! You can’t borrow your way out of debt. You can’t get out of a hole by digging out the bottom. True debt help is not quick or easy. The simple but sad truth is that debt consolidation hardly ever works.

Debt consolidation seems appealing because there is a lower interest rate on some of the debt and a lower payment. However, in almost every case we review at Hinds & Shankman, LLP, we find that the lower payment exists not because the rate is actually lower but because the term is extended. If you stay in debt longer, you get a lower payment, but if you stay in debt longer, you pay the lender more in interest, costs, and fees, which is why they are in the debt consolidation business.

Consolidation loan services, in truth, don’t do much that you can’t do yourself. And they’ll often require hefty fees for their services: either in interest, in up-front fees or in monthly fees when you run your payments through them. Sometimes, such services are a good idea, but not if they’re going to cost you more money in the long run. You’re probably better off looking into debt consolidation options on your own. You could move your high-interest credit card debts to a no- or low-interest option, take out a home equity loan or possibly get an unsecured line of credit.

As with most things in life, when you take out the middleman, the costs go down. If you are considering using a debt consolidation company, try to work out your debt problem in other ways before opting for a potentially expensive loan.

If you put your house on the line as part of a debt consolidation effort here is where debt consolidation can cause serious problems. Consolidating your debt onto a home equity loan or line of credit — while a reasonable approach in some cases — puts your home at risk. Think of it this way, you are betting your house against the stuff you bought for family and friends last Christmas. If you use a home equity loan, line of credit or cash-out refinance to consolidate your debts, recognize you are guaranteeing the loan with the pink slip to your home. It may seem like a good idea — especially with today’s incredibly low interest rates, but you’re going from unsecured debt to debt that’s secured by your most important asset: your home.

If you’re considering leveraging your home’s equity to consolidate credit card debt at a lower interest rate, make sure you can make this extra payment. Also, make sure you still have at least 20 percent equity in your home by the time you take out your line of credit or second mortgage. If you default on the loan, you’re at risk of foreclosure—just like if you defaulted on your original mortgage.

The answer is not the interest rate; the answer is a total money make over from the ground up with a change on mind set. The way you get out of debt is by changing your habits. You need to commit to getting on a written game plan and sticking to it. Get an extra job and start paying off the debt. Live on less than you make. This is not rocket science, but it is emotional, which is why most people need help getting through getting out of debt. The bottom line is don’t try debt consolidation!

Debt Restructuring

The goal here is very similar to debt consolidation. Here you want to lower the amount you pay in interest on your debt by restructuring it. This generally requires that you how much debt you actually have.

Start by building a simple spreadsheet with the name of the credit card issuer, the total amount you owe and the interest rate charged on an annual basis by the credit card issuer. The target is to get to a lower interest rate as quickly and cost efficiently as you can.

Once you have the list nailed down its time to tackle how to restructure your debt so you can pay less each month. Here are three things you can do today to help you do just that:

  1. Call your credit card company(ies) and negotiate for lower rates. The higher your credit score, the more likely they are to work with you. Sometimes credit card companies run a special where you can transfer your balance without a fee. That’s the type of deal you’re looking for on www.magnifymoney.com. Look for a card that offers a 0% interest rate for at least six months and the lowest transfer fee available. Take note that when doing a balance transfer, credit card companies will often charge you a fee of about 3% of the total balance you’re transferring.
  2. Transfer the balance of your higher interest rate credit card(s) onto a lower interest rate card(s).
  3. Look into taking out a low-interest rate loan and paying off those high-interest rate cards and student loans. This is another way to restructure your debt and save on interest.

However, if your credit isn’t decent, you may not qualify for a balance transfer card.

Bankruptcy

While it may seem like the most drastic step, sometimes it’s necessary. Just don’t wait until you are about to lose your house or have drained all your retirement savings to talk with a bankruptcy attorney.


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