Debt consolidation. Does a day go by without you hearing at least one commercial for someone who will do this for you? There are hundreds-perhaps thousands-of agencies, companies, and individuals touting various remedies for credit card debt. Ever wonder why? People try a lot of things to keep the debt collectors off their backs. These efforts, from debt counseling and consolidation to home-equity loans, to making payments when the collectors hound you enough, may sound like good strategies to keep the collectors off your back, but sometimes they're not a good idea. Sometimes they can really hurt you. debt consolidation loans
Take any kind of debt negotiation or consolidation, for example. These all involve "reportable" actions, which means that your "settlement" with the credit card is reported as some form of nonpayment, with negative effects on your credit score. If you have the discipline and stamina to make payments for several years, and if you have the luck to keep your job all this time, then these remedies are better than defaulting completely and being sued. But those are big ifs. Making the necessary payments is not easy, and most of the people I have represented who went through this program of consolidation and reduction have fallen out of it for various reasons. debt consolidation loans
Home Equity loans can also reduce your overall payments and eliminate your credit card debts, but there is a price you pay for the banks' eagerness to lend you money. The price is that the home equity loan is "secured" by your home. In plain English, that means that if you default (fail to make a payment), the bank has a right to foreclose on your house, evict you and sell your home to pay the loan. In many states this is a so-called "non-judicial" proceeding. That means the bank can kick you out of your home without even proving anything in court. Preventing wrongful foreclosure is difficult and expensive. This makes so home equity loans a risky temporary solution with a large possible downside. It is the ability to foreclose on your home that allows banks to charge less for home equity loans. debt consolidation loans
Most people with large credit card debts have recurring issues with their incomes. Often they have lost their jobs or seen their income diminished for some other reason. Sometimes there are other issues. If these problems do indeed come back, you may find yourself homeless. debt consolidation loans
There's another unintended consequence of any of the debt solutions out there. By making some payments or arrangements for payments, you remove your loan or credit card from "default" status. That means that the debt collector cannot sue you-sounds good, right? Well, yes and no. If you go on to make the payments, you have only the workout to mess up your credit report. On the other hand, if anything prevents you from making your payments then you have extended the length of time your debt is reportable. You have also extended the statute of limitations for any lawsuit the debt collector might choose to bring. debt consolidation loans
Let's step back and look at some of the relevant legal background here. First is the time limitation on reporting bad credit events. That limit is imposed by federal law, and it is seven (7) years. It is illegal to report a failure to make a payment (or other negative credit fact) after seven years. For example, if you take a loan and stop making payments for three years, the company will report your nonpayment for all three years and could plan to do so for the next four years. On the other hand, if you then consolidate your debts, make one payment on the new arrangement, and then miss your payment on the "new" loan, the creditor will have the right to report your latest failure to pay for another seven years. So you will have increased the length of time the loan has hurt you. debt consolidation loans
Every right to bring a lawsuit eventually expires. It is limited in duration by something called the "statute of limitations." That means that after a certain period of time a creditor or debt collector can no longer bring a lawsuit to attempt to force you to pay in court. The statute of limitations is imposed by state law, and the states are not consistent. Moreover, there is some argument about what type of suit is being brought when a company sues you on a credit card debt. In Missouri, it looks like it is a plain "breach of contract" suit with a five year statute of limitations. The debt collectors sometimes argue that they are suing on a note for the payment of money, which has a ten year statute of limitations. debt consolidation loans
Whatever the statute of limitations, it will "run" (that is, run out) if the debt collector does not sue you within a certain amount of time, and because these debts are frequently quite old, the statute of limitations is often very close by the time the debt collector negotiates with you. If you renew the debt in any way, either through a consolidation or home equity or other loan, or even if you make occasional payments whenever you can, you breathe new life into the debt. debt consolidation loans
There's another issue. As I have frequently noted, debt collectors rarely have the documentation needed to prove that you owe them any money. If you renegotiate, and specially if you use a new loan, you may solve this problem for the debt collector and create a new paper trail supporting the debt. This will hamper your defense if you become unable to make payments later. debt consolidation loans
As painful as it may seem, you will often be better off not doing anything to salvage old credit card debts. In seven years their impact on your credit history will disappear, and usually before that the company will lose its right to sue you. If it does sue you, you can fight back more effectively if you have not renewed the debts in any way.
