Everyone struggles with debt from one degree to another, but, in some cases, the debt can just continue to mount. If this happens to you and you’re feeling overwhelmed, you may think that bankruptcy is your only alternative. Even so, that can be a step you’re reluctant to take. Before you commit to a path that could have an even more devastating effect on your credit score, you might want to ask your accountant if debt consolidation is right for you.
Why is Debt Consolidation Often More Preferable?
Debt consolidation is easier in some cases, because bankruptcy courts now require credit counseling and participation in other financial education programs. Even if you qualify for a scholarship, such as those offered by Robert Tweed, you may still have to invest more money in order to qualify for this type of debt relief. Even after you have met these conditions and the bankruptcy has been approved, you’ll still face a long, uphill battle to rebuild a good credit rating.
Can You Qualify for Debt Consolidation?
There are two main types of debt consolidation that most people make use of rather than to pursue bankruptcy. Personal loans comprise the first most common type, although they can be hard to obtain for people in severe financial trouble. Essentially, your loan should be large enough to pay off other loans and credit card debt, so you’ll only have this one monthly payment. Under ideal circumstances, this one payment will be lower than the sum of your previous debts. However, if your credit score is too low, you may not be able to qualify for the loan you need.
The second option is to obtain a new credit card and transfer your debts to this card. The idea behind this strategy is that you make large payments early on and reduce your card balance to zero, before the 0.0% introductory interest rate expires. This can help you pay off your debts without adding more high interest payments.
What Fees Should You Expect?
There are debt consolidation companies that offer to facilitate this process and help you get out of debt more efficiently. While some of these companies are legitimate, others are scams and it’s up to you to be wary of them. Under FTC rules, these companies cannot require an upfront fee from you and they cannot charge you a fee until at least one debt is eliminated. Additionally, be sure to obtain a fee schedule from them before agreeing to use their service. If they refuse to supply this information, you may be dealing with a disreputable service.
Will Debt Consolidation Stop Creditors from Harassing You?
If a debt consolidation service says they can stop harassing behavior, they are likely telling you just what you want to hear. The only two ways to stop harassing phone calls or the threat of a lawsuit are by paying off the debt or filing for bankruptcy. Until your debts have been eliminated through one of these two methods, you should not expect the harassing phone calls, letters, and emails to stop.
What About Taxes?
Forgiven debt is considered income by the IRS and, therefore, it may be taxed. This means you’ll be expected to claim this amount as taxable income. However, if you can show the IRS that you are insolvent and unable to pay debts, they may waive the taxes you owe on these amounts.
There are many different ways to pursue debt consolidation, either on your own or through a service. Whichever options you choose, it’s important to thoroughly understand how those choices will affect your future. Find out how much the process will cost you, what the tax consequences will be, and how long it will take to complete the process and become debt free. Taking the time to understand the terms and to obtain those terms in writing will help protect you and can ensure that you really are improving your situation.