A consolidation makes sense only if you can lower your overall interest rate. Many people consolidate by taking out a home equity line loan or home equity line of credit (HELOC), refinancing a mortgage, or taking out a personal loan. They then use this cheaper debt to pay off more expensive debt, most frequently credit card loans, but also auto loans, private student loans, or other debt.
Jean ChatzkyWhen you default on a secured debt, the creditor takes the asset that backs up that debt. When you convert credit card debt to mortgage debt, you are securing that credit card debt with your home. That's a risky proposition.
Jean ChatzkyThe debt settlement company will direct you to stop paying your creditor and instead send the money directly to them each month. The company's goal is to demonstrate to your creditor that you don't have the money to pay up - that's your leverage. After a few months, the company will typically go to the creditor and say, "I'm holding X dollars on behalf of your customer. He doesn't have the money to pay you, so you should take this amount as a settlement or you'll end up with nothing." If the creditor wants to get paid badly enough, it will take the money.
Jean ChatzkyYou also need to understand that when you consolidate credit card debt into mortgage debt - like a home equity loan or a HELOC [ home equity line of credit ] - you're taking an unsecured debt and turning it into a secured debt.
Jean ChatzkyGet your friends involved. Let your shopping buddies know that you're on a tight budget, and they can help you out when your willpower starts to weaken at the mall.
Jean Chatzky