If your finances begin to spin out of control and you are faced with looming debt as well as an expensive mortgage, you may think the easiest way out is bankruptcy or foreclosure. However, Americans who find themselves in sticky financial situations may be able to take care of their debt problems without damaging their credit.
Debt Management
If your debts are more than you can manage, consider consulting with a government-approved credit counseling agency to create a sensible budget and a plan to pay down your debts. You can also attempt to contact credit card companies to which you owe balances. They may lower your interest rate to make your monthly payments more affordable. Furthermore, you may consult with a third-party credit negotiator to lower your credit card balances and pay off your debts more quickly without bankruptcy.
Consolidation
If your monthly debt payments or interest rates are sky-high, consider obtaining a consolidation loan. If you own a home and have equity in it, you may qualify for a second mortgage, or home equity loan. These loans allow you to borrow against your own equity to pay off expensive balances at a low interest rate. Better yet, interest paid on a home equity loan or line of credit is tax-deductible on federal income taxes. If you do not have equity in a home, apply for a personal loan. Lenders will require collateral and charge a higher interest rate, but you may find it easier to pay a single monthly bill rather than multiple payments to many creditors.
Foreclosure Alternatives
The U.S. Department of Housing provides all Americans with free access to foreclosure counselors. The counselors can provide you with foreclosure alternatives. Some homeowners are eligible for special loan modifications or refinance options under President Obama's Homeowner Affordability and Stability Plan. This plan allows you to stay in your home, as well as lower your monthly mortgage payments to a price you can afford. If you don't qualify for this plan, talk to your mortgage lender as soon as you have difficulties affording your payments. Lenders may choose to work with you to help you stay in your home, but timing is critical. As you get further behind on payments, your lender will become less flexible.
Warning
Beware of scams that seek to profit from your misfortune. Some debt negotiation agencies may claim to be non-profit or government-approved and are likely to charge expensive upfront fees for their services. Avoid companies that instruct you to stop making credit card payments or that claim to be able to lower your overall debt balances. While the company may eventually be successful in following through on these claims, there are no guarantees that the services will work. Worse, you may end up with a much higher debt due to overdue payments, fees, compiled interest and penalties.
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