Debt consolidation is a financial strategy that allows you to combine all of your debts with high interest rates into a single monthly payment at a lower interest rate. You are, in effect, consolidating your debts into a single manageable account that leaves you with one payment for your monthly expenses including:
- Credit card payments
- Medical bills
- Personal loans
- Payday loans
- Other expenses
With a lower interest rate, more of your monthly payment goes towards the principle, not the interest. This helps you be able to pay off your debt faster and you will know exactly when you will be out from under the crushing debt. While consolidating loans into a single loan can be useful for managing your debt, it does not reduce the overall amount of debt. In a nutshell, you are shifting your debt into one account with a lower payment at the end of the month.
If you are struggling to keep up with bills and are on the receiving end of debt collection actions, a debt consolidation lawyer in Rockville, Montgomery can evaluate your situation and develop a plan to help you get out of debt.
How Does Debt Consolidation Work?
Debt consolidation alone does not reduce the amount of the debts; it combines them into a single debt with a more manageable monthly payment. One benefit is that if you negotiate a lower interest rate for the new loan, you will pay off the debt for less money. You can repay your debt in full without struggling to make minimum payments on multiple higher interest loans every month.
You could get a loan with a lower interest rate from a credit union or bank, or other source of funds. You may be able to get a home equity loan to pay off your outstanding debts. A home equity loan is considered a secure loan because your home is collateral. If you do not own a home or the value in your home is too low to be eligible for a home equity loan, you may be able to get a personal loan.
People who are considering a consolidation of their debts may choose to obtain a fixed-rate, personal loan with a lower interest rate than their current outstanding loans. They can use the money from that loan to pay off unpaid debts and then pay back the loan in installments with a lower interest rate and new terms.
To begin, you need to gather up all of your monthly statements and determine the interest rates for each one. Once you have that information, you can compare your current debt load to the interest rate and monthly payments for a new loan that consolidates your debt. A debt relief attorney can guide you through the process of identifying and calculating your debts to determine whether debt consolidation is appropriate for your situation.
Bankruptcy AS A Debt Relief Option
Bankruptcy is another form of debt relief. If you have no way to repay your debts, bankruptcy is another option. Filing for bankruptcy is a serious matter and requires the assistance of an experienced bankruptcy lawyer who can advise you about which bankruptcy option fits your situation, and help you navigate the bankruptcy process. Having a bankruptcy on your record affects your credit history and you would not be eligible for any new credit for at least two or three years.
There are two kinds of bankruptcy as a debt relief option: Chapter 7 and Chapter 13. A Chapter 7 bankruptcy is also referred to as a liquidation bankruptcy. The goal is to liquidate your assets to repay creditors. Homes, vehicles, and personal items are usually not included in a Chapter 7 bankruptcy.
A Chapter 13 bankruptcy is also known as a reorganization bankruptcy. The plan is to reorganize your financial situation so that you can repay your creditors. Some debts may be discharged, or a repayment plan may be developed.
Does Debt Consolidation Affect My Credit Status?
While debt relief may initially affect your credit score in a negative way, the drop is temporary. If your credit is good enough to qualify for a personal loan to consolidate your debts, you can pay off those debts as soon as you obtain the new loan. Once you pay off outstanding loans, those payments are recorded on your credit report, and this could improve your credit status. A bankruptcy can remain on your credit report for a long time and will affect your credit status in a negative way.
What Is The Best Solution For Debt Consolidation?
Choosing the best solution for debt consolidation is a complicated process with serious, long-term ramifications. It is helpful to consult with an experienced debt negotiation lawyer who can advise you about the best course of action to take that addresses your needs and will produce a positive result eventually.
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