You need a debt consolidation solution because when you are being harassed by creditors and stressed by debt, you might not always get your priorities straight.
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You might wind up paying a credit card bill when the rent or mortgage is due just because an aggressive bill collector is making your life miserable. Risking eviction or foreclosure over a bill that could be wiped out in bankruptcy court or at least postponed with no major consequences, might not be a very smart decision.
Your bills fall into three categories:
1 - ESSENTIAL BILLS: the ones that, if you don’t pay, will result in disastrous consequences.
Bills: Mortgage, rent, home equity loan, lines of credit -
Consequence: foreclosure or eviction
Bills: Groceries -
Consequence: starvation
Bills: Utilities - Consequence: absence of lights, heat, water or phone/internet
Bills: Payments on a car need for work - Consequence: job loss
Bills: Essential medical treatments - Consequence: death or serious illness
Bills: Child support - Consequence: jail time
2 - IMPORTANT BILLS: the ones you should pay whenever is possible, or face serious consequences.
Bills: Income taxes, court judgments - Consequence: wage garnishment , loss of tax refund
Bills: Student loans - Consequence: wage garnishment , loss of tax refund
Bills: Secured loans on a property you want to keep - Consequence: repossession of property
Bills: Auto insurance - Consequence: loss of license, fine
Bills: Medical insurance - Consequence: high medical bills
3 - NON-ESSENTIAL BILLS: failure to pay these debts could have serious repercussions for your credit score and might eventually result in lawsuits and judgments. But by skipping these payments you won’t end up on the street.
Credit Cards
Store Cards
Gas Cards
Medical Bills
Legal Bills
Personal Loans
Loans from friends or family members
You must try to make the minimum payment on these to stay current. Loans from family or friends can be left for last, unless of course, your uncle’s first name is Vito and his last name is Corleone.
Can you cover the minimums required on the first two categories - essential and important bills?
If not, it’s frequently possible to get forbearance on your student loans or negotiate payment plans with IRS. Child support can be reduced if you prove to the court that your financial situation has worsened, (this can take some time and you’ll need lawyer’s assistance.) Take that second job for a while. Also you could increase your paycheck by eliminating or reducing 401k contributions, or if you get tax refunds, by reducing your withholding. If you still can’t pay for the essential and the important, some last-resort actions will need to be taken like selling the house, if you own one, or renting a cheaper place.
Now, if you can cover the first two categories, check to see if you can make the minimum payments on you non-essential bills. To pay off those non-essential debts you should consider using a debt consolidation solution like a home equity loan or line of credit as a way of paying off your cards. But in order to do it successfully you must commit to not using your credit cards to pile up more debt, at least until the loan is paid back. Not borrowing more than 90 percent of your equity, for this being an important source of emergency funds you don’t want to completely lose. Don’t use your home equity loan as an excuse to stretch out your debt.
You could be able to retire your credit cards or other unsecured debts in less than five years. But you must commit to these Debt Consolidation Solution steps or you’ll ultimately get yourself deeper into debt.
If you still have good credit score, you might be able to convince your lenders to lower your interest rate so that you can get the debt paid off faster. Credit card companies are often eager to give their good costumers a break, rather than risk losing them to competitors. This Debt Consolidation Solution strategy will only work if you're on relatively good terms with your credit card company.
If you can pay off your unsecured debts without help or with the help of home equity loan, you are ready to take the next step: destroying your credit cards. Because you can’t get out of the debt well if you keep digging. Your credit cards must be off limits until you are debt free. Debit cards are accepted at most places that take credit cards and you avoid running up balances, there's no bill to pay at the end of the month. And since the money comes from your checking account, it makes you think twice before overspending.
Do not actually close your credit card accounts though, it could potentially hurt your credit score.
You’ll need to set up a payment plan to pay off your debts. An account that’s close to being charged off, for example, needs to be taken care off first, while you make the minimum payments on your other debts.
If you are not behind, you should start paying down the one that’s closest to its limit, or the one that has the highest non-deductible interest rate. Typical credit card late fees are in the $25 to $30 range. If you have three cards and you miss payments twice a year (even by one day), you're out $180 for the year. If you remember to pay your bill on the due date or a day or two before, call the credit card company. Some will let you pay over the phone with a check. The charge for this service is often $10 to $15, but that's a 50 percent savings over a late fee, and you avoid the black mark of a late payment on your record.
