Debt Management Options

Unit 3: Debt Management Options

Debt Consolidation

Debt consolidation entails taking out one loan to pay off many others. This is often done to secure a lower interest rate, secure a fixed interest rate or for the convenience of servicing only one loan.

Debt consolidation can simply be from a number of unsecured loans into another unsecured loan, but often it involves a secured loan against an asset that serves as collateral, most commonly a house. In this case, a mortgage is secured against the house. The collateralization of the loan allows a lower interest rate than without it, because by collateralizing, the asset owner agrees to allow the forced sale (foreclosure) of the asset to pay back the loan. The risk to the lender is reduced so the interest rate offered is lower.

Sometimes, debt consolidation companies can discount the amount of the loan. When the debtor is in danger of bankruptcy, the debt consolidator will buy the loan at a discount. A prudent debtor can shop around for consolidators who will pass along some of the savings. Consolidation can affect the ability of the debtor to discharge debts in bankruptcy, so the decision to consolidate must be weighed carefully.

Debt Consolidation Loans

An alternative to working with debt consolidation companies is to seek a debt consolidation loan with your credit union.  A debt consolidation loan combines unsecured debts such as credit card monthly payments into one single monthly payment.  Consolidating your debt in a single low-interest loan can save on interest payments and speed the process of paying off debts.  Here are two common loan types: 

  • Signature Loans only needs the borrower's signature and promise to pay as collateral. Also known as a personal or good faith loan, eligibility is determined by a member’s credit history and debt-to-income ratio.  
  • Debt Consolidation Loans are personal loans used to pay off multiple other loans and/or credit card debt. The advantage to these loans is they’ll have lower interest rates than the original debt, and allow the borrower to make one payment per month instead of several.


Personal bankruptcy generally is considered the debt management option of last resort because the results are long-lasting and far reaching. People who follow the bankruptcy rules receive a discharge — a court order that says they don't have to repay certain debts. However, bankruptcy information (both the date of your filing and the later date of discharge) stay on your credit report for 10 years, and can make it difficult to obtain credit, buy a home, get life insurance, or sometimes get a job. Still, bankruptcy is a legal procedure that offers a fresh start for people who have gotten into financial difficulty and can't satisfy their debts.

There are two primary types of personal bankruptcy: Chapter 13 and Chapter 7. Each must be filed in federal bankruptcy court. Filing fees are several hundred dollars. Attorney fees are additional and can vary.

  • Chapter 13 allows people with a steady income to keep property such as a mortgaged house or a car that they might otherwise lose through the bankruptcy process. In Chapter 13, the court approves a repayment plan that allows you to use your future income to pay off your debts during a three-to-five-year period, rather than surrender any property. After you have made all the payments under the plan, you receive a discharge of your debts.
  • Chapter 7 is known as straight bankruptcy, and involves liquidation of all assets that are not exempt. Exempt property may include automobiles, work-related tools, and basic household furnishings. Some of your property may be sold by a court-appointed official—a trustee—or turned over to your creditors. You must wait 8 years after receiving a discharge in Chapter 7 before you can file again under that chapter. The Chapter 13 waiting period is much shorter and can be as little as two years between filings.

Both types of bankruptcy may get rid of unsecured debts and stop foreclosures, repossessions, garnishments and utility shut-offs, and debt collection activities. Both also provide exemptions that allow people to keep certain assets, although exemption amounts vary by state. Note that personal bankruptcy usually does not erase child support, alimony, fines, taxes, and some student loan obligations. And, unless you have an acceptable plan to catch up on your debt under Chapter 13, bankruptcy usually does not allow you to keep property when your creditor has an unpaid mortgage or security lien on it.

You must get credit counseling from a government-approved organization within six months before you file for any bankruptcy relief. Also, before you file a Chapter 7 bankruptcy case, you must satisfy a "means test." This test requires you to confirm that your income does not exceed a certain amount.

CAUTION: Depending on the chapter filed, bankruptcy remains on your credit report for seven to ten years. This has the worst possible affect on your credit rating. Before filing bankruptcy talk to your credit union or the experts at Trinity Debt Management. 

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