Debt Counseling Tips

Be a savvy consumer of debt counseling or debt management programs. It's an unfortunate truth that not everyone offering to help you get control of your finances has your best interest (as opposed to their own) at heart.

Approach Debt Consolidation Loans with Skepticism

While a loan to consolidate all of your debt into a single obligation is appealing and may have a lower interest rate than credit card interest rates, make sure that you can really repay that amount. Understand clearly the terms, including the interest rate on the loan.

It may be that even lowering the interest rate does not make your present debts manageable, but just postpones the day of reckoning.

Find out whether the loan will pay off over the life of the loan, or whether you will owe a "balloon" lump sum payment at the end. For many borrowers, balloon payments are just an invitation to another loan, and you never get free of this debt!

Think Twice about Home Equity Loans

If you can't pay your present unsecured debts, all your creditor can do is sue you and try to collect on the judgment. If you can't pay your home equity loan, you may lose your house in foreclosure.

Most states provide a bankruptcy exemption that protects a given amount of equity in your home and puts that equity beyond the reach of your creditors. If you voluntarily use that equity to satisfy a creditor, the exemption no longer protects your home.

Understand the Program

If you participate in a program where a service negotiates with your creditors or makes payments on your debts for you, understand whether the service promises to lower the amount you owe or the interest rate you pay, or just promises to lower the payments you make every month, without significantly changing your obligation. Know what happens if a creditor won't negotiate.

Make sure the program deals with all your debt. Some debt counselors confine themselves to dealing with your unsecured commercial creditors, excluding your obligations for child support or unpaid taxes. In effect, they ignore the debts that won't go away, while channeling your money to creditors whose claims could be jettisoned in bankruptcy.

Don't Overpay

There are several debt management programs with modest cost to you, the client. Approach for-profit or fee-based services with caution and make sure that the service is worth what it costs. Make sure that you don't worsen your situation by enlisting others to help with debt management. While it is comforting to have an ally in your struggle, make sure that their help has your best interest at heart.

Cathy Moran is a business and bankruptcy lawyer in the San Francisco Bay Area, and was one of the first bankruptcy specialists certified by the California State Bar. Her website Bankruptcy in Brief includes much information on bankruptcy.

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