One of the most common questions for people seeking debt relief, is whether or not debt consolidation is the right choice, but there is no definitive answer this question. Your financial difficulties, even though they might be the same as someone you know, might require a a different answer depending on your situation. For some, debt consolidation might be the answer. For others a debt repayment plan might be the best solution. For still others, bankruptcy, yes, bankruptcy might actually be the best choice.
First it is important to gather all of your financial details and calculate your total debt. I keep a running total of mine of this blog so I can never escape that number. Reviewing your debt gives you a very clear view of the financial situation that you are really in. Often, we look at our debt in pieces (“I only owe Visa X, but I owe Mastercard Y”) and not in its entirety (I owe everyone Z), which might not help when tackling the problem of our debt.
Second, determine if you could easily repay your debt with your current income and potential future earnings. If say, you are a medical intern with $300,000 in debt currently making $35,000, you are in a completely different situation than a line cook at McDonald’s making $7 an hour with the same amount of debt. The difference is in your future earning potential. A had a coworker with no health insurance who suffered a heart attack. The hospital bills afterwards was enough to give me a heart attack. Even though he had a six figure debt and was making $12 an hour, he was determined to try to pay if off. It’s safe to say that he was not going to ever do so (he was in his late 50’s) in his lifetime.
Third, make an effective plan to budget and stick to it. At he very least you want stop increasing your debt, but the best scenario is one where you being to work your debt downward. I hate budgets, but I have a loosely created one that I try to stick to. Visit my friend at Budgets are Sexy if you need even the most basic help on budgeting.
If you can consolidate your debt at a lower interest rate, do so. While considering debt consolidation or any debt management plan, there are a couple of things to consider:
- Actual savings each month
If you are consolidating you debt, you must be able to see some immediate savings off of having you debts separated. Stick to the consolidation plan with rates that are lower than what you are currently paying. While considering a debt consolidation a lower monthly payment can give you an idea of savings, but in reality it usually involves a longer repayment period, which might wipe out any savings. But if you are truly struggling, a lower monthly payment might be helpful until you can add extra payments to your plan.
- Improved cash flow
If can be hard to track multiple payments to multiple places leaving the opportunity for missed payments and late fees. If there is only one debtor to repay this might actually improve your cash flow.
- Reduced stress level
I know that I never had heartburn like when I didn’t know how to tackle my debt. Sometimes having just one payment can reduce your stress which might have the effect of boosting your confidence which might in turn help you make more money. Don’t believe it? Studies show that shrinking violets make less money that the most visible people in the office.
- Effect on credit rating
A debt consolidation can either negatively of positively affect your credit rating. Technically you are taking a new loan which will be recorded in your credit history, but if you make regular payments on a timely basis and maintain it, your rating should bounce back and could possibly even improve.
If a debt consolidation program doesn’t work for your, you might want to consider a debt settlement. You can choose a debt settlement company to negotiate on your behalf of you can try negotiating directly with your creditors. Usually this means that creditor will close your current accounts and dramatically lower or eliminate interest as long as you follow an agreed upon repayment schedule. Make not mistake that this will negatively affect your credit, because these accounts will show as “Account Closed by Credit Grantor”, but in the long run, this can have a positive effect on your credit because you would have avoided bankruptcy.
We can’t forget our good friend bankruptcy. I know that everyone is scared of this and would rather spend time avoiding bankruptcy, but it is an option for a reason. My debts wouldn’t qualify because most of mine are secured or government loans that can not be discharged (like my student loans). Bankruptcy might result in your being put into a payment plan and not a complete discharge of your debts. I have heard of people filing bankruptcy multiple times and I’m not just talking about celebrities. Charges in the bankruptcy code was meant to dissuade people that abuse the system. But if you were like my coworker, living in a single room apartment, with a six figure hospital bill due to no health insurance, it might be a legitimate option.