Credit Counseling Agencies – Credit counseling agencies work with your creditors to lower the interest rate you pay on your unsecured debt. For their services, you pay the agency a monthly fee. While they may succeed in lowering your monthly payment, they do not lower the amount owed, nor do they stop the principal of your debt from increasing. Thus, the process may help you avoid bankruptcy for awhile but your credit will be severely impacted while you are in the program. Completing the process takes years and many debtors never see it through completion. Many Agencies make the majority of their income collecting fees from creditors on whatever their clients repay. Some credit counseling agencies have been accused of keeping their clients paying their creditors in a consolidation plan rather than filing for bankruptcy, even if a fresh start is in the debtors’ best interests. Some agencies have demonstrably neglected to make timely payments, or even pay at all, and many have failed to make deals with all the creditors. Not all agencies are at fault, but given the stakes involved, you should carefully investigate an agency before joining its program.
*Note- If not ALL of your creditors agree to the payments and plans these companies offer, the entire plan can be thrown out and you will have to start all over. This can be very time consuming and expensive with no gratifying results and an end result usually leads back to bankruptcy!
Home Equity Loans – The major downside shared by all second mortgages, home improvement loans and home equity loans is that creditors require the borrowers to use their homes as collateral for the loan. So the creditor obtains a lien on your home.When people try and pay off their credit cards or other debts with a home equity loan, they turn dischargeable debt (like a credit card bill) into secured debt (a second mortgage). If they end up having to file bankruptcy later on, they get stuck with a lot of debt that would have been discharged if they hadn’t gotten a home equity loan.While home equity loans are often attractive because they usually offer low interest rates and lower monthly payments. Creditors are willing to offer these lower rates because they know that they can foreclose on the property if the borrower is unable to pay back the loan. Home equity loans can be beneficial in the right situation, but if you’re considering a home equity loan or line of credit because you can’t make your monthly payments, you really need to consult with an attorney before using your home as collateral and potentially creating a bigger problem in the long term.
Debt Consolidation Loans/Title Loans – Debt consolidation loans (including car title loans) are personal loans that allow people to consolidate their debt into one monthly payment. The payments are often lower because the loan is spread out over a much longer period of time. Although the monthly payment may be lower, the true cost of the loan is often dramatically increased when the additional costs over the term of the loan are factored in.The interest rates on personal debt consolidation loans are usually high, especially for people with financial problems. Lenders frequently target people in vulnerable situations with troubled credit by offering what appears to be an easy solution. Personal debt consolidation loans can be either secured or unsecured. Unsecured loans are made based upon a promise to pay, while secured loans require collateral. Upon default of the loan payment in a secured loan, the creditor has a right to repossess any of the items listed as collateral for the loan. Title loans are an example of secured loans, where an automobile’s title is listed as collateral and the borrowers must pay off the loan to reacquire their title. Some creditors require borrowers to list household goods in order to obtain a debt consolidation loan. The creditor has a right to repossess these items upon default of the loan payments. In many states, a person filing bankruptcy can remove the lien on the household goods listed as collateral and eliminate the debt.