With unemployment high many people who previously did not think they would ever have to claim bankruptcy are now having to consider it.
Debt consolidation is when you transfer your debt accounts into one larger account. You will still owe the same principle, but your payment will be smaller.
I consolidated my student loan accounts after I got out of school. I had two loans, one for my undergraduate education and another for grad school. My monthly payment for one of the loans was $80 a month and the other was $65 a month. When the two were put together my payment was $102 a month. Although the principle was the same, my minimum payment was $43/month lower.
This can be due to two reasons.
- Debt consolidation may extend the time of your loan (which reduces the principle amount you pay each month but will increase the amount of interest you pay over the life of the loan).
- Debt consolidation may allow you to negotiate a better rate. In the case of the student loan the interest rate for the consolidated loan was almost a full 2% lower.
A debt management plan is an arrangement between you and your creditors, which can be facilitated by a debt management group. You should not pay for this service; it is free. The benefits of a debt management plan are:
- The debt management group will deal with your creditors for you (which helps reduce stress)
- The amount you pay back is something you can afford
- You do not have to go through bankruptcy
Having to declare bankruptcy is hard. Make sure you look at all your options prior to making a decision. Both debt consolidation and a debt management plan can help you avoid having to declare bankruptcy.