When Is Debt Consolidation A Good Idea?
I have about 10,000 in debt not counting student loans, and even making the payments to the collector’s have me struggling to maintain any type of comfortable lifestyle. I’m 23 and still can’t finish school because I won’t get pre-approved for a loan to get my BA. I can’t even afford to go to junior college since I already have over 60 credits and don’t even have the money for that. I’m pretty sure if I could consolidate my debt, I could afford it and save up to finish college, and actually have some type of emergency money. My debts are over 1.5 years old. Problem is, I keep hearing consolidation is a bad plan and it’s not good for you.
Please help.
All if not most of my accounts are already charged off. I’m at around 10,000-$15,000 in debt. By consildate, I mean by going through a debt consildation company. I’m passed the negotiation stage with the creditors as I never knew that was an option before it was too late.
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Jub B said,
May 22, 2010 @ 9:53 pm
It depends what you mean by consolidate.
Will the new interest rate be lower than your current one? (Good if it is)
Is it paid off in more time (you will spend more in the long run)?
Are you going to rack up this level of debt again?
A lot of people take out equity from thier house to pay off debt which is a good strategy but ONLY if you keep your debt paid off and don’t continue to build credit card debt. If you do this you are essentially spending your equity to purchase items at the expense of your future.
CatDad said,
May 22, 2010 @ 10:46 pm
Per your update that your accounts are already defaulted/charged-off:
Paying back defaulted, charged-off credit card accounts is a tricky matter and it might not be in your best interest to pay it back, as doing so may stir up more trouble than it’s worth. Here’s why:
- When a credit card is charged-off as bad debt, you need to understand that the damage to your credit is already done and there is no undoing it. Don’t make the mistake of simply cutting a check to whatever collection agency has the debt for the charge-off and assume that your credit rating will be magically restored…Doing so will not remove it from your credit reports. It will simply be updated to a “Paid Charge-Off,” which, while slightly better, is still a seriously derogatory item. Per the Fair Credit Reporting Act, a charge-off, whether paid or not, can remain on a consumer’s credit reports for up to seven years. This does not mean that you will have bad credit for the entire 7 years though.
- Renewing contact with debt collectors out of the blue can stir up all sorts of problems. It’s my position that a tiny increase in your credit score is not worth the risk of triggering aggressive collection activity against yourself. Your effort could be met with threatening, abusive collection calls…threats of lawsuits…and once they find out that you are willing to pay they will probably add on all sorts of fees and they’ll come after you for two or even three times the original amount of debt. Even worse, they might decide to take you to court to try to get a judgement against you for the debt…leading to possible wage garnishment of 25% of your wages.
- There are two reasons that you may want to consider paying back a charged-off account:
1) You are applying for a new mortgage, loan or apartment and the creditor is insisting that all defaulted items be paid off
2) There is a confirmed lawsuit pending on the debt
If neither of these apply, then it’s often best to take a “Don’t Ask/Don’t Tell” approach…just sit tight and let the charge-off fall off your credit report naturally in 7 years.
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If you’re going to pay off old-charged-off debt anyway, then you might as well negotiate the lowest, rock bottom settlement you can possibly get, being that the negative charge-off notation is going to stay for 7 years on your credit report, regardless of whether the charge-off is paid or unpaid. …Offer 25%. Mail them a vaguely worded statement like:
I am willing to settle this matter for 25% of the original amount. This is in no way an admission of this debt, but rather an attempt to settle this matter. Your firm must send me a written agreement on your company’s letterhead that you will accept this amount as “payment in full” and that is issue will be settled. Upon receipt of this agreement, I will mail you a money order for this amount.
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- Settled/Forgiven debt is treated like earned income with the IRS…any debt that is forgiven must be added to your next year’s income and you’ll have to pay whatever additional taxes