John E. Pytte Oct. 12, 2017

If you are at the point in your personal finances where you are overwhelmed by this debt, you need to know that there are several solutions. The most popular is debt consolidation; however, there are several forms that this can take. The following are the pros and cons of each type.Debt ball and chain

What does it mean to consolidate debt?

In its most basic form, all of your debts are combined, so you are making a single payment each month. The payment can be less than the sum of the monthly payments you are currently making on each individual debt. There are different ways this this is achieved.

A secured loan

If you have something of value to use as collateral, usually the equity in your home, you can borrow the money yourself, and then pay off the balance of your debts. You will then a a single payment to make on your home equity loan.

The disadvantages of a secured loan

To begin with, many people who have crushing debt do not own a home, and those that do, may not have much equity. However, if you do have equity, you will likely be exchanging unsecured debt, such as credit cards, for a secured loan. If you cannot make your payments, it is possible that you will lose your home.

An unsecured or partially secured loan

There are companies that specialize in debt consolidation loans. These firms will pay off your debt, and then you will pay them a monthly amount of money that will be less than your combined payments you are making right now. This will bring relief to your monthly budget. It will stop all of the hounding bill collectors because you won't owe them any more. It simplifies your debt because you only have one loan. You will have less stress, and be given a chance to get your finances straightened out. These loans are closed end. You will be making a certain number of payments, and then the loan is paid off. This is much different than credit cards. You are not likely making much progress by simply making the minimum monthly payments on your credit cards. This type of loan makes credit repair easier because you have paid off your creditors, and all you need to do is make your loan payment on time each month.

The disadvantages of an unsecured or partially secured loan

Sometimes people with poor credit have a difficult time getting these loans, but if you can, the interest rates will be high, and you’ll end up paying more in total. Another issue will be the reason you are in debt in the first place. Without changing your financial habits, you may not benefit from consolidation because months from now you will wind up in the same situation you are in now.

A Chapter 13 bankruptcy

Chapter 13 is a personal bankruptcy that allows you to have your debts organized in such a way they you can pay them off. A bankruptcy judge will determine how much of your debt you can afford to pay off. This will usually mean a reduction in principal owed as well as an elimination of future interest owed. You will make a single payment to a trustee, and then the money is distributed to your creditors. Although your debts are consolidated, there is no lender. When the total number of payments, as determined by the courts, have been made, your bankruptcy is discharged, and you will be debt free. You will need an attorney for a bankruptcy filing, but with legal representation, all of your creditors must communicate with your attorney, and the harassing phone calls will end.

The Disadvantages of a Chapter 13 bankruptcy

Your will have a bankruptcy on your credit report for seven or more years. This makes credit repair difficult, and you may not be able to get much, if any, for some time to come. You also need to qualify for a Chapter 13 filing. An attorney can help you determine if you qualify.

As you can see, there are many options for debt consolidation. Your best course of action is to start with a consultation with an attorney with a specialty in this area. Often an initial consultation is free.