Things To Consider When Consolidating Debt

According to the official US Courts website, over two million individuals filed for bankruptcy in 2005. If someone feels that they are under the strain of a significant amount of debt and are contemplating declaring bankruptcy, then they may have considered consolidating debt as an alternative. While this may indeed be a viable option, there are of course both pros and cons that should be considered before making this decision. The following are some factors that should be kept in mind when deliberating what is the best course of action to take.

Unfortunately for some, these days it is very easy to get credit. More and more people have taken advantage of this, sometimes to the point of going beyond their financial means. Credit card use from department stores, gas stations, and other retail outlets is on the rise. When paying interest on all purchases, it is easier to fall behind than it may appear. With the temptation of low introductory rates offered by many credit card companies, often times people will just keep accepting more and more credit card offers, not taking into consideration what the fees and charges will be after the introductory period is over. Things can quickly get out of hand.

Once things get to a certain point, often times people will start thinking about bankruptcy. For most people this is a scary concept. It will of course show up on ones credit report, and can remain there for up to 10 years after filing the case. It is at this point that many will start exploring debt consolidation. By consolidating debt, there is only one monthly bill to worry about. On average, the monthly amount on this one payment will be much less than what would be paid to several creditors. If the majority of the debt comes from interest bearing sources, then potentially a fair amount of money can be saved on the interest rates currently being paid out. Also, due to the fact that debt consolidation loans are generally considered to be second mortgages, it should be generally easy to get a fairly low interest rate. The second mortgage is a secured loan, which does mean that defaulting on the loan can mean the loss of a house. However, simply taking an unsecured loan out to combine all of the debt results in the interest rates being much higher, lowering the overall savings.

The possibility of losing a house by falling too far behind on a debt consolidation loan is a very real one, and must always be kept in mind. While filing for bankruptcy can hurt, and cause major inconveniences where matters of credit are concerned, the loss of a house can be much worse. One should always make sure they know that they will be able to make the payments without putting too much of a hardship on themselves or their family. It is a good idea to set aside enough money to be able to make payments for a couple of months with no income, to cover any unforeseen events.

Another issue with debt consolidation loans is that it is very easy to get back in debt. The debt consolidation loan pays off all creditors. This means that a person will have more credit available, which can open someone up to more temptation. Many people get themselves into trouble because they start using their credit cards again. Within a year, often times they are right back to where they started.

Even with the dangers involved, there are some definite benefits with debt consolidation. When making payments on credit cards, the interest paid goes to the credit card companies. The payee never sees this money again. However, by consolidating debt, the monies paid out go towards the interest on a mortgage. In many cases this amount can be used at the end of the year as a tax write-off. While this does not actually mean getting the same amount back as is paid out, it does help in less is paid in income taxes than otherwise would be.

Every person will have their own unique set of circumstances that will need to be considered in situations involving debt, and the options available for them to get out of it. All options should be gone over carefully. As always, it is a good idea to consult with a financial advisor or attorney before making decisions surrounding possible bankruptcies.