A debt consolidation is one way to avoid bankruptcy and pay off your debts. Consultants at the Federal Trade Commission report that deciding to use a debt-management agency depends on how much debt you have, how disciplined you are and how your future financial situation looks. For those who do not know how to make and stick to a budget or need someone to negotiate with creditors, a debt-consolidation company may provide a solution.
Step 1
See a credit counselor before signing up for a debt-management plan. Credit counselors can review your debt and tell you whether you are the right kind of candidate for debt consolidation. They can apprise you of what to expect, what kinds of questions to ask the debt-management company and what kinds of paperwork to bring with you for your first appointment.
Step 2
Get a referral from the credit counselor to make sure that you will be dealing with a reputable consolidation firm, advise FTC financial consultants.
Step 3
Make an appointment with the recommended debt-consolidation company, and bring in all your current bills, tax statements, past-due notices, pay stubs and other financial obligations.
Step 4
Deposit money into the account set for you by the debt-management firm to pay your bills. It is important that you not miss these payments as it will affect your credit report and you cannot begin the process again once you have defaulted on a debt-consolidation agreement. The debt manager pays your bills from this fund, which includes the fee charged by the debt-consolidation company.
Step 5
Consolidate your debt on your own by taking out a loan to pay off all your bills. Many consumers use a home equity line of credit or second mortgage to consolidate bills. The advantage of using your home as collateral is that the interest paid on the loan is tax-deductible.
Tips and Warnings
- Make a financial plan and a budget and stick to it. Even though you may have consolidated your debts into a manageable monthly payment, you must follow a strict budget to avoid piling up additional debt. Debt-consolidation companies often don't reveal this information because the more debt you have, the higher fees they can extract from you, according to financial consultant Dave Ramsey.
- Beware of the slew of shady debt-consolidation organizations operating in the market. Signs of fraud or misrepresentation include being asked for money upfront or to put money into an account under a name different from your own. Don't use companies that pressure you to join their firm or that refuse to send you free information prior to your first appointment. Don't consider using a debt-consolidation company that does not spend considerable time evaluating your finances.
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