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Learn How to Consolidate Debt

Learn How to Consolidate Debt
HIGHLIGHTS
  • Seek debt relief options, including debt consolidation.
  • Learn about your financial situation and your debt relief goals.
  • Seek professional guidance. Bills.com offers a debt coach tool, and a free consultation with a debt relief expert.

How to Consolidate Debt: 3 Steps to Debt Consolidation

Debt is a burden. We all face the challenge of making ends meet. Sometimes our spending outreaches our income and we rack up large credit card bills and other loans. This can be because of large medical bills, a drop income, or just unwise spending habits.

Once you have large debts, it becomes hard to break the cycle of debt. Just making minimum payments on your old debt takes up more and more of your monthly income. Debt consolidation is one way to deal with your debt. Figuring out how to consolidate debt in a way that is best for you depends on your individual situation.

Here are three steps to take to consolidate your debt:

  1. Learn about different debt relief options, including debt consolidation.
  2. Get control of your financial situation.
  3. Find the right option for you.

Step I: Learn about Debt Consolidation and Debt Relief Options

In order to find the right solution you must consider all of your options that include:

  1. Debt consolidation programs, such as debt management and debt settlement.
  2. Other ways to deal with your debt such as optimizing your payment schedule, cash-out mortgage refinancing, taking out a personal loan, and filing for bankruptcy.

Here is a quick summary of your major debt relief options:  

Major Debt Consolidation programs:

Debt Management: One form of Debt Management is credit counseling and the debt management program (DMP) it offers. Credit counseling starts with an analysis of your income and spending. If appropriate, your credit counselor will recommend a DMP to help you repay your unsecured debt, such as your credit cards and unsecured loans, more efficiently. The credit counseling company then works out interest rate reductions on your accounts and may even get some fees waived. You make one payment to the debt management company, who then pays off your different creditors. You will pay off 100% of your debt at more favorable terms, becoming debt free faster. 

Debt Settlement: Debt Settlement programs focus on negotiating reduced pay-off balances with your creditors. In a debt settlement program, no payments are sent to your creditors on a monthly basis. The money you put in the program is held safely in a special-purpose bank account that stays in your control. The funds are kept safe until they are used to pay off  the negotiated settlements. Your debt settlement company handles negotiations with your creditors, but your creditors can continue with the collection process. In the end, a debt settlement program can save thousands of dollars, getting you out of debt at the lowest cost while avoiding bankruptcy. Reputable debt settlement firms do not take an up-front fee, only getting paid for their work on an account after your settlement is finalized.

Other Debt Consolidation and Debt Relief options:

Optimizing your payment schedule: Pay off your debt quicker by applying extra funds to your credit card debt. Two options are the avalanche and snowball strategies. You can either pay off low balance debt first, and work your way down the line, or pay off high interest rate accounts first.

Cash-out Mortgage Refinancing: If you have equity in your house, then borrowing from your home's equity may be your best debt consolidation option. However, it comes with some risks. You have to be very disciplined, to make sure that you don't run up new debt, once you have paid off your old debts.

Personal loan: This is another common debt consolidation solution. A borrower can take out one large unsecured loan to pay off smaller debts. In order to receive a personal loan you will need a good credit score. In addition, these loans are generally expensive. Once again, if you do not control your spending and new debt level, you will find it impossible to maintain the payments on your debt consolidation loan and on the new debt you take on.

Bankruptcy: There are different types of bankruptcy, Chapter 7 and Chapter 13. Under all bankruptcies, you will have to show a hardship and inability to pay off your debt. A chapter 13 bankruptcy will restructure your debt and allow for payments over a mid-term schedule, while a Chapter 7 will wipe out your debts, but may force you to liquidate assets you own.

Step II: Get Control of Your Financial Situation

In order to figure out how to consolidate debt in the way that is best for you, you first need to know:

  • Exactly what you owe and at what interest rate
  • To whom you owe the money
  • Your monthly cash flow

Here are some guidelines to the second step of how to consolidate debt:

Balance Sheet: How much do I owe? Make a list of all your assets on one side, and all of your debts on the other side. Include in the table your loan amount, interest rate, monthly payment, and number of months till pay-off.

Cash flow: How much can I pay? Make a budget. Bills.com budget guide shows  you all the steps to creating and maintain a budget.

Credit score: How much of a hit am I willing to take on my credit score? Check your credit report and your credit score. If you have strong credit, income, and own assets, different options are available to you than if your credit is already damaged and you're struggling to pay your bills.

Goals: Do you have court judgments? Debt collection letters/calls? The deeper you are into the collection process, the fewer options you have for debt consolidation. Here are some goals to consider:

  • Manageable monthly payment: Can you meet your current monthly payments, or do you need to lower them?
  • Cheapest solution: Are you willing to face harsh collection practices in order to save the most money?
  • Earliest solution: How important is it for you to find a solution that will get you out of debt as quickly as possible?
  • Credit rating: Are you willing to have your credit score hurt ?
  • Stress: How well do you handle stress? Can you deal with creditor's collection calls?

Step III: Choosing a Debt Consolidation Option

The third step learning how to consolidate debt is the hardest part. You must choose between the different options. Before you contact a professional debt consolidation company, it is important that you follow the first two steps above. These steps will prepare you to ask the right questions, and find a debt relief solution best suited to your needs. The bottom line- debt consolidation and staying debt free is up to you.

In order to help you choose the right option and the best debt consolidation option Bills.com provides you the following tools:

Debt Coach: Use this tool to help you decide on which debt relief option is best for you, based on your income, debt, and goals. You will receive advice, tailored for your situation. The debt coach tool also provides detailed information about the different options.

 

Debt Consultation: Contact one of Bills.com's pre-screened debt providers for a free, no-hassle debt relief quote. You'll receive a free analysis of your situation and a recommendation of the best debt relief option for you.

Now that you have learned how to consolidate debt, take the first step and improve your financial situation. These steps will help you save money, reduce your stress, and help you move forward debt free.

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