Anyone could have unforeseen and catastrophic events strike their personal and financial lives: divorce, medical bills, unemployment. Maybe you were living a certain lifestyle but you were responsible and had sufficient income to service your car loan, house payment, student loans and other obligations. However you lost your job and were unemployed for longer than expected and burned through your savings too quickly. You have a new job paying less than before. What to do?
You could get a debt consolidation loan which essentially means that a bank or S&L pays off many of your high-interest loans: car loan, credit cards and maybe a home-equity line of credit. Then you make one payment per month rather than many, and hopefully the interest rate is less than the 22% charged by those credit cards. By getting all of your late accounts paid off, a debt consolidation loan has the added benefit of helping your credit score (assuming that you are not then late paying off the consolidated debt payments).
A New Budget
This is going to be a difficult time. You and your spouse need to take some time to talk about just what expenses are absolutely necessary and what things are relative luxuries. Maybe you can get by on one car. Cars are very expensive when you include tax, depreciation, loan payment, insurance and maintenance. If one of you can take the bus you’ll save a small fortune and might not have to cut back on other things like cancelling the cable TV. A budget is all about tradeoffs.
Shop Around
So you’ve decided that maybe a debt consolidation loan is the way to go. Before you sign anything take the time to gather information. Reading this article is a good first step. Also talk to kith and kin who might have been in a position similar to yours. Don’t rush into the first debt-consolidation loan that you find. There are many different terms (length of repayment and interest rate) to consider.
Credit counseling – Keep these things in mind.
Beware of credit counseling companies. Many of them are paid for by the very companies who issue credit cards (Citi, BofA, Wells-Fargo). You might think that they are on your side in the negotiation between yourself and the credit card companies, but they will work to get the very best deal for the companies without regard for your interests.
Bankruptcy – Last or First Resort
If you’re already in deep financial trouble, have been late on many loans and your income can’t service your debt, maybe it is time to consider bankruptcy. But you’ll need to weigh the pros and cons. Obviously BK will hurt your credit rating so it shouldn’t be entered into lightly, but it might not be a lot worse than all of the late bills that you’ve already put on your credit report. And if you suffer under your present financial millstone of insufficient income and too much debt you’ll continue to be late and hurt your credit score for years to come. You might be better off to bite the bullet, declare bankruptcy and take this one-time hit to your credit score. At least this final act stops the continual hits to your credit score caused by many late payments and gives you the chance to start anew. Use this opportunity to avoid falling into this painful hole again.
