There are numerous reasons that someone will fall into unmanageable debt including loss of income, serious illness, or long-term mismanagement of credit accounts. Once the downward spiral starts drastic measures are required to stop the slide. Any debts that are being carried to pay for a car or a boat must be evaluated for possible sale of the asset to eliminate the monthly loan payment. When bad credit has developed due to late payments and unpaid bills, the borrower must qualify for bad credit debt consolidation and understand the advantages and disadvantages of participating in a debt management program.
Qualification Requirements
Most debt management programs require that all the debt to be consolidated falls into the unsecured debt category, which means that no assets are tied to the outstanding loans. When the debt load is between $5,000 and $20,000, most borrowers can qualify for a debt consolidation loan. Consistent income is required as proof of the ability to pay the debts and participate in the program by making monthly payments on time. Credit history is reviewed for participation in debt consolidation.
To participate in a standard debt management program, the accounts cannot be seriously delinquent. For those with bad credit and seriously delinquent accounts, some debt management firms will recommend a debt relief settlement or a debt negotiation. Both of these approaches are taken when the amounts owed are substantially larger than the debtor could ever repay. These steps are more drastic and require extensive negotiation with the lender.
Many credit institutions have eliminated their bad credit programs in favor of helping the borrowers who have moderate debt levels and do not present high risk of default. The few institutions that still offer programs for those with poor credit will charge substantial fees for program participation. Favor within the banking industry has turned to skepticism against anyone with a poor track record of repaying outstanding debts.
Advantages of Debt Consolidation
A single payment for all outstanding debts is the most recognized immediate benefit to participating in a debt consolidation program. All outstanding debts are combined under one loan that is held by the debt management company. When the monthly payment is made by the borrower to the debt manager, the individual payments to the lenders are then made by the company. Bill payments are made in a timely manner and all debt collection activities cease. Terms of the consolidation loan vary, but most payment plans span multiple years and monthly payments cannot be missed or late. As the original outstanding loan balances decrease, the credit score will improve. Some debt consolidation companies offer the option to borrow additional cash, but this often is rarely available to anyone with a poor credit history.
Disadvantages of Debt Consolidation
Standard debt consolidation loans offer lower interest rates, but having poor credit will greatly increase the interest rate paid to the debt management company. Being viewed as a poor credit risk is very expensive to the borrower who must pay more to borrow money and offset the risk of default to the lender. When monthly payments are lowered and some extra cash is available, many borrowers will continue to overspend their income and remain in a negative cash flow situation. Change in spending habits is not required by most debt management agencies, and some will even allow the borrower to retain the credit cards that are being paid off.
When the credit situation is negative enough to require a debt relief settlement or debt negotiation, there are negative entries made to the credit record with all three credit bureaus. The credit score will be lowered and a record of the non-payment of the negotiated amount will appear on the history for a number of years. Perform extensive research and read all agreements prior to taking these steps. Sometimes initial impacts to the credit history are required to get the borrower on a path to repairing the credit rating going forward.
Debt management firms advertise low fees for those who wish to get out of debt, but beware of embedded fees that will be paid later in the program. Borrowers with bad credit will pay higher fees because of the perceived risk that they will drop out of the debt management program. Some firms will offer renegotiation of terms within the program after the borrower proves serious commitment to repaying the debt.
Conclusion
Some borrowers are in such extreme debt that only filing for bankruptcy protection from creditors will correct the debt problem. Refrain from taking the drastic step into bankruptcy if there is any way to avoid it. Take financial management courses to learn how to manage the existing income with new habits and live within your means. Sell any unused household items and large assets to earn some additional cash in the earliest months of the debt management program. Write out a household budget and spend less money than is earned every month. When participating in a bad credit debt consolidation program, study past spending habits and learn to control impulse buying. Only after spending habits have been changed can a borrower stay out of debt and manage the household income.
