Millions of Americans are struggling with debt.  Falling housing prices and adjusting mortgages aren’t helping the matter, making it increasingly difficult for the average debt holder to pay more than the minimum on credit card debt.    So what do you do when you find yourself over your head in debt?

Debt consolidations can provide attractive offers.  The goal is to take all outstanding debt and merge it into one easy payment.  Instead of paying 10 different creditors with 10 different interest rates you’ve only got one payment to make at one steady rate.  It may sound like a miracle fix that avoids the stigma of bankruptcy, but there are things to beware.

FEES. If you have an offer to consolidate your debt onto one credit card, be sure to read the fine print.  Most of these offers carry fees of 3% – 6% of the total balance transferred.  So if you are looking to put $10,000 from various cards onto one at a low rate, the fees alone would cost $300 – $600.    If you are looking to work with a Credit Counselor investigate exactly how they will be paid.  It might not be an “out of pocket” expense, but often the fees are rolled into the consolidation loan.  The consolidation company can also take it’s fees off the top of your new monthly payment, leaving less each month to go to the actual debt.  Know the costs before committing.

INTEREST RATES. Are you actually paying a lower rate on the consolidation?   List out the fees and interest rates on all your existing accounts to determine the total payments you now make.  Compare that amount with a potential consolidation payment and interest rate to ensure actual savings.

TAXES. The biggest hidden cost in a debt consolidation is taxes.   Most people are unaware that the difference between the amount you owe and any amount forgiven by a creditor is taxable as ordinary income.  For example, if you owe $10,000 and have that amount negotiated down to $6,000, you would be liable for taxes on the forgiven amount of $4,000.  The IRS refers to this amount as the “Discharge of Indebtedness” (DOI) and you are likely to receive a 1099 from the debtor for that difference.

Credit Counselors and debt consolidation loans can offer to lower your monthly payments for you, but it is worth your time (and bottom line) to see if you can do this yourself.  The goal is lower payments and interest rates, so call each and every one of your creditors and explain your specific income situation.  The majority will work with you to lower your payments and interest rates, as long as you ask.   Be tenacious:  if at first you don’t succeed, call every week until you get payments lowered.  Get yourself organized, know your payments and stick to a budget to pay off your debt.

Further Reading

• Knee Deep in Debt? Kick Up Your Heels (0)
• 4 Ways to Start Lowering Your Debt (2)
• Blogger Focus : BeingFrugal.net (0)
• Got Extra Cash? 3 Better Places to Stash it Than Your Mattress (2)
• What to Do If You Can’t Pay Your Bills (2)

Tags: Bankruptcy, Credit card, Credit card debt, Creditor, Debt, Debt consolidation, Loan, mortgage

This entry was posted on Thursday, March 5th, 2009 at 9:00 am and is filed under Budget, Credit, Debt, Life. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.