Best Avenues for Debt Consolidation

Andrew Housser, Bills.com, 650-571-0961, x201, andrew@bills.com
Aimee Bennett, Fagan Business Communications, 303-843-9840, aimee@faganbusinesscommunications.com

SAN MATEO, Calif., Sept. 20, 2006 – A big pile of credit card bills can make anyone feel as if she’s drowning – and most people in debt trouble find that as soon as they promise themselves not to charge any more, an unexpected bill pops up. “If the problem is too many accounts with too-high minimum payments at crippling interest rates, debt consolidation can be an answer,” said Andrew Housser, co-CEO of Bills.com. “Debt consolidation essentially means combining and downsizing your debts so they are easier to repay.” Housser explained that benefits of consolidating can include:

• A lower interest rate. This also can lower your minimum payments. As a result, you can more easily meet your monthly budget, or pay more than the minimum to repay your debt more quickly.
• Possible tax advantages, if you use a home equity loan as part of your strategy.
• Peace of mind from knowing exactly what you owe and when the debt will be resolved.

Here are the top 10 ways available today to obtain funding to consolidate, and pay off, debts:

1. Borrow from your 401(k) or other employer-sponsored retirement account to pay off debt. Most plans allow you to borrow from the balance, as long as you repay the account within five years (or be assessed taxes and penalties). This option should be used as a last resort since the money in the 401(k) is intended for retirement years. And if you leave the job associated with the account, the loan will be due immediately.
2. If you have life insurance, borrow money from your policy. Strictly speaking, you don't ever have to pay the amount back if you can't or don't want to, but it will be deducted from the amount paid to your beneficiaries. For this reason, planning to pay the money back is advisable.
3. Borrow the money from family or friends. It probably will save you interest. Associated problems include the potential for damaged personal relationships, the expectation of a return of the favor years down the road, and possible legal action against you by someone who was previously a good friend or close family member.
4. Consult a debt management service. Make sure the service does not charge high fees, and make sure to check with your local Better Business Bureau (BBB) or other consumer protection agency. You'll likely sacrifice freedom to open and use additional credit lines and, in many cases, your credit rating. The service usually will ask you to make one monthly payment, which it will use to pay your creditors.
   In constructing “debt management plans” for consumers, credit counseling agencies reduce only interest rates, not principal owed. While you may see lower monthly payments, you may also face up to five years of making payments, and minimum payments may not significantly decrease.
   Be careful with credit counseling, as most agencies receive funding from creditors – meaning their incentives might align more with creditors than with the consumers they are supposed to be serving. In addition, the Internal Reve¬nue Service recently revoked the tax-exempt status of every one of the 41 credit-counseling agencies on which it completed an audit, so do not be swayed by claims of non-profit status. In choosing a debt management service, a firm’s reputation with the BBB and former clients is far more important.
5. Negotiate. Consumers can call creditors and request a lower interest rate. Those who cannot make even minimum payments on bills can try calling credi¬tors and asking for temporary hardship status. While creditors are under no obligation to negotiate, it is in their interest to do so since it makes payoff more likely.
   You also can work with a debt resolution firm, which negotiates on consumers’ behalf to lower principal balances due – often up to half the amount owed. Consumers pay the debt resolution firm a portion of the savings. Debt resolution typically provides better repayment terms than those achieved with a Chap¬ter 13 bankruptcy filing – and with no permanent bankruptcy judgment.
6. Find help in the mail. If you have a decent credit score (for instance, you pay your bills on time, but you’re overwhelmed by how much you owe), you are likely bombarded with credit card offers. Consider taking advantage of a lower-interest transfer offer. Make sure to (1) Read the fine print to calculate the balance-transfer fee. (2) Choose a card without an annual fee. (3) Be confident you can pay off the balance before the rate expires. (4) Once you make the transfer, put away old and new cards and stop charging.
7. Take a title loan on a vehicle. You can borrow against a vehicle with a clear title. Make sure you understand the terms, get the rate you want, and have a clear payment schedule.
8. Take out a personal or signature loan. Weigh this option carefully, as the interest rate on this type of loan may not be significantly lower than what you're already paying.
9. Refinance your home and take cash out at closing. This will help you pay down your high-interest debt and can be tax-deductible. Make sure that there is no possibility of missing a payment, because you don't want to face a foreclosure because you transferred too much unsecured debt to secured debt.
10. Borrow against your home. If you own your home and have enough equity, you may be able to take out a home equity loan or line of credit. You can use the money for anything you would like, including debt consolidation, and the interest you pay on the loan will be tax-deductible. However, using your house to pay off unsecured debt can be very risky. If you choose this route, make sure you leave yourself some financial breathing room so that if something unexpected does happen, you will not risk losing your home.

“Debt consolidation is less damaging to your credit score than bankruptcy or default. It can put you on the road to better credit – as long as you choose assistance wisely,” Housser explained. “Whether you manage your own situation or enlist an advisor, know that there are many choices to free yourself from debt.”

Based in San Mateo, Calif., Bills.com is a free one-stop online portal where consumers can educate themselves about complex personal finance issues and save money by choosing the best-value products and services. Since 2002, Bills.com’s partner company, Freedom Financial Network, has provided consumer debt resolution services, serving more than 10,000 customers nationwide and managing more than $250 million in consumer debt. The company’s co-founders and CEOs, Andrew Housser and Brad Stroh, were recently named Northern California finalists in Ernst & Young’s 2006 Entrepreneur of the Year Awards.