Debt Consolidation Alternatives

Debt Consolidation Alternatives

Debt consolidation can be a smart way to get financial problems under control. However, this option is typically open only to those whose credit scores remain relatively high.

If you see the winds of your finances about to change and avail yourself of this craft before the storm hits, you’ll usually be in smooth waters (assuming you manage the loan properly).

However, you’ll need to consider some debt consolidation alternatives if your credit situation won’t let you qualify for a loan.

What Is Debt Consolidation?

This method of dealing with debt can take a number of different forms, all with the ultimate effect of combining all of your debt (or as much of it as possible) under one umbrella. This gives you fewer debt payments to make each month and can result in a substantial decrease in the interest rate you’ll pay (if you shop carefully).

Debt consolidation can take the form of a personal loan, a formal debt consolidation loan, a home equity loan or line of credit and credit card balance transfers. In each case, you’ll be asking a lender to help you restructure your obligations to make them easier to manage. Qualifying for one of these instruments is usually easy if your credit history is good. If you’ll be seeking one of these loans with bad credit, you might benefit from thinking along the lines below.

Seek a Co-Signer

There are instances in which family members, close friends or business associates will help you out. When an individual agrees to co-sign a loan with you, they are, in effect, loaning you their credit standing. In other words, they agree to satisfy the obligation if you default. For this reason, it’s extremely important to consider your situation carefully and be absolutely certain you can live up to your responsibility. Many long-term relationships have fallen victim to co-signed loans gone awry.

Credit Management Program

In this scenario, you’ll meet with a credit counselor who will review your situation and offer budgeting advice as well as money management guidance in general. You’ll be in good shape if that’s all you need to do to address your situation. If the circumstances are a bit more involved, the counselor will likely recommend a debt management program, debt settlement or filing for bankruptcy protection.

In a credit management program, the counselor will negotiate with your debt holders in an effort to get interest rate reductions and fee waivers to help make your debts easier to repay. They’ll establish a fund into which you’ll pay each month, from which they will disburse funds to your creditors — in effect taking over the payment of your bills.

Debt Settlement

This strategy is similar to credit management, in that you’ll work with an agency representative who will also communicate with creditors on your behalf. However, debt negotiators will seek reductions in the principal amount you owe, in addition to interest rate reductions and fee waivers.

You’ll cease making direct payments to your debtors and instead deposit the money into an account the agent will use to satisfy your debts as agreements are reached with the people you owe.

While you’ll often pay less overall to resolve your obligations this way, your credit score will take a hit, as your debtors will report the stopped payments to credit reporting agencies. On the other hand, if the settlement is your best option, your credit score could improve quickly as you resolve your debts.

Bankruptcy Protection

The most extreme legal means of debt resolution, you’ll file for court-mandated shelter from your creditors, and for this, you’ll need to choose a bankruptcy lawyer. If it is granted, you’ll either have to sell off certain assets and pay your creditors based upon what you can get, or you’ll walk away from most of your debts altogether. Creditors, who will lodge reports on your credit history that will stay there for up to ten years, look upon neither approach favorably.

As you can see, each of these debt consolidation alternatives has its advantages and disadvantages. Before choosing to invoke one of them, take a good look at all of your options so you have the highest chances of success going forward.


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