Borrowing to Get out of Debt

Borrowing to Get out of Debt

A common question that is asked in people trying to avoid bankruptcy is an inquiry about a debt consolidation loan or a signature loan or a home equity loan or some type of loan that if they just had one easy payment, the mess one go away and they could avoid a chapter 7 or chapter 13 bankruptcy filing.

Despite what the government may tell you, you cannot borrow your way out of debt. Most people get into financial problems because they borrowed too much. Borrowing more will not fix the problem. Yes a lower interest rate can help a little, but if you owe 50,000, and the rate is lowered from 15% to 10%, you are saving around $200 a month. If the $200 a month is going to change your life, then cancel the cable and cell phone because this will net you $200 in most cases. The problem is you owe $50,000.

The next is that your total monthly payment is reduced. Once again this may free up some cash, but you still need to pay back the debt. Now instead of maybe paying $1000 combine to several companies, you are paying only $600 to one company. The problem is you still owe all the debt. Another thing to consider, is when you do a debt consolidation loan, they will charge you for the loan. If a credit card advance check, this can be 5% of the balance.

As to borrowing against your house, you are trading unsecured debt for secured debt. This is never a good idea. In a chapter 7 or chapter 13 bankruptcy, it is easier to eliminate unsecured debt than secured debt. This is just creating more debt problems.

If you are having debt problems, step one is digging the debt hole. Look to cut back, increase your income, create and stick to a written budget. If needed look to a bankruptcy professional to file a ch 7 bk or a ch 13 bk. There is help out there, but not in the form of borrowing more money.

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