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Debt Consolidation

Posted by Kevin on September 21, 2009 under Bankruptcy Blog | Be the First to Comment

Debt consolidation is where you combine a number of debts, usually with high interest rates, into a single debt with a lower interest rate. The result is a lower, single payment. On its face, debt consolidation is a good idea.

But, you have to be aware of what you are getting into. First, if you are dealing with a counseling company, there is usually a fee attached to the service. Make sure that you are dealing with a reputable counseling company (see discussion on credit counselors), that the fee is reasonable, and is not paid, in full, up front.

Most offers from debt consolidation, however, do not come from credit counselors but from banks or other financial institutions. In most of these cases, the bank will offer to wrap your credit card debt into a lower interest, tax deductible second mortgage. Not usually a bad deal, but as said above, know what you are getting into.

Credit card debt is what is referred to as unsecured debt. That means there is no collateral to support the debt. If you do not pay unsecured debt, the creditor can sue you and get a judgment. The creditor can attach a bank account or garnish your wages, but will probably not be in a position to foreclose on your house.

When you consolidate your credit card debt into a second mortgage, you will pay less each month and probably have a tax write off. However, what you have done is turned “unsecured debt” into “secured debt”. Moreover, if the second mortgage is a home equity line of credit, it may very well be at an adjustable rate. So that low interest rate that you signed on for may be good for only a year.

If you default on secured debt, the second mortgage holder has the right to either sue on the Note or foreclose on your mortgage or do both. If your house has substantial equity, then the creditor will probably choose to foreclose and take out the first mortgage. Now, instead of a few nasty telephone calls and a possible wage garnishment, you could lose your home.

Go into any debt consolidation with open eyes. If your job is laying off workers, it may not be a good idea to consolidate. If your employment is stable and your health is good, consolidation may be a good idea.

One last caveat- never consolidate your debt into a second mortgage with the company that has your first mortgage. In many cases, the documents will state that a missed payment on the second constitutes a default on the first mortgage. Then your chances of being foreclosed on are that much better.

For further information, please refer to the following videos

Introduction to Bankruptcy

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