I have been a mortgage broker for about 7 years now and see thousands of credit reports and here tons of stories every month.
A debt consolidation is basically in its simplest form - a private bankruptcy, HOWEVER it doesnt privetly affect your credit rating. It affects it the same or worse in more ways then one.
The best choice is to try and file Chapter 7 Bankruptcy and completely get rid of the debt with zero payback if possible, and if not go for chapter 13 and set up a payment plan with the most legitmate agency...THE GOVERNMENT themselves.
Here is a explanation on why a bankruptcy hurts u alot less than credit consolidation.
Lets say you have 10 accounts of cars/credit cards/student loans...etc etc that u are looking to consolidate. Well in a private consolidation those accounts total lets say 50K .
You owe 5K per account (jus for ease of math)
Your payment would normally be the 50K plus a nominal fee of 5-10% or less...so you would pay back around 55K total when all said and done....the longest usualy for these loans is 3 years. so 36 months and 55K is about 1500 every month of payback.
Now during this period your debts are frozen and interest cannot be added, but here is the MAJOR difference.....in a private consolidation the company doing the consolidation basically takes ur 1500 each month and sets up a bank account in your name for the funds....once 5K is banked they then pay an account off one by one, (so roughly every 3-4 months) and so on and so forth....now what the companies do who u have the debt with is lets say they are first to get paid. You then have a 120 day late payment on that credit rating of that one account....then comes the next account (roughly 240 days late...or at that point an official COLLECTION or judgement awarded to said company......now if u think about this that is really tearing up your credit, especially on the last 5 account which would exsist in collection for 2-3 years and not paid till the money is banked......truthfully u could do this on your own in your own bank account or set up payments with said creditors.
The real disadvantage is this....when u are in collection or on late payments your credit score begins to take a dive and gets buried BELOW 500 (impossilbe for any financing ) for a very long time and until the last account comes out of the payment which would be the FULL 3 years. So u suffer with very low credit and basically will have to put ur life on hold during this time...ALSO NEVER MISS A PAYMENT or everything comes back into forward mode (and full balances are due again + interest).
Now with bankruptcy obviously Chap 7 resets ur entire credit profile and u start like an 18 year old virgin and get credit offers almost on the way out of bankruptcy court....so lets compare the above method with CHAPTER 13 (repayment through US GOVERNMENT)
Chapter 13 - the same system however the 50K in accounts can be decided to settle for smaller (depending on budget) and can also be extended for up to 5 years.....The only fees involved is a lawyer fee of around 850 and court costs of roughly 450 $ (both of which can or sometimes cant be rolled in)....lets pretend u pay it up front.
so 50K / 60 months (5 years) and ur payments are only 830$ (this is if u have to repay the full debts which normally isnt the case, because it doesnt fit into ur budget (otherwise how did u get into situation))...but we will pretend it still budgets well.
so u save roughly 600-800$ each month and can put that money into a bank or savings account of your own (rather then the 1500 payment due to debt consolidators.
Also once the bankruptcy is started EVERY creditor has to freeze the account and only report one answer with two choices back to credit bureu.....1 is are u in a repayment plan through bankruptcy and satisfacotry and 2 is are u in default on repayment....now in chapter 13 bankruptcy if u miss one payment u can also be forced to start all over from the begining and interest charges may also be piled on top.........lets say u pay on time.....the number 1 statement of satisfactory payment is the EXACT same rating per Equifax guidlines as if u were a perfect paying customer on a normal credit account.....and here is why :
when you do a repayment through the government they dont have a bank account set up and pay money in lump sums.....since it is a feature u can only use once every 7-10 years in your life (to file bankruptcy) they have exclusive rights witht hese creditors to help u restablish credit rating . When u make ur payment of 800+$ it is automatically distributed evenly amongst the 10 accounts u have open that are being paid in the bankruptcy...so each account recieves a monthly payment and they are content with that as they are guranteed all the money awarded by the bankruptcy (due to the if u miss a payment they can charge interest and demand full balance clause)......so TECHnICALLY from day one when u start bankruptcy u begin to restablish credit like a new 18 yr old virigin....THIS IS THE MAIN REASON WHY THIS IS YOUR BEST OPTION>
because you get a FULL 3 years of building credit back up and even by 6 months into the Bankruptcy u can usualy get financed for cars and re-apply for credit and loans....WHY u ask??? cause U CAN ONLY do bankruptcy once every 7-10 YEARS , so the creditors KNOW u have to pay the debt and can therefore TRUST The SYSTEM put in place.
MY recommendation is to calla few bankruptcy attournies and get the ball rolling.....the faster u start (a free consultation) the faster the debtors will quit calling....the garnishments will stop...and u also get a 3 month break noramally before any payments have to be made in the first place (due to the court system normally taking awhile to setup terms)
a 2nd strong recommendation is this.....since with CHAP 13 bankruptcy u will save roughly 700$ per month...bank half the money and save other half to pile into you bankruptcy...there is no penalty for early payment and even if u pay it off early no one can jump in and say they want more money (for instance if u end up settling the 50K debt for 30K or whatever amount).
that way say at year 3 you would be fully payed off and also have roughly 10K in the bank to put down on a house or car or put into an IRA.....its really like gettin the best of both worlds.
GL in whatever u decide....ultimately it is up to u.
I hope i could help.....if u have any other questions feel free to ask a mod for my email...maybe i can lend a helping hand in guidance....afterall we are near the holidays.
-murph
