Bad Credit Mortgage Tips: Bankruptcy Versus Debt Consolidation Loan
Many consumers find themselves in large credit card debt and unable to make their recently increased payments. In the past, debtors with late payment problems and no solution in sight could file Chapter 7 bankruptcy and eliminate any unsecured loans. With the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 now in effect, filing for bankruptcy is not the easy answer it used to be. Noted bankruptcy specialist Michael H. Reed, a partner at the Pepper Hamilton LLP law firm in Philadelphia, explains: “Under the new amendments, the bankruptcy administrator, or any creditor, can dismiss a Chapter 7 filing if the income of the debtor are higher than the state median income. “
Since bankruptcy is often not the best option, the best solution is debt consolidation loans. If you have equity in your home, now may be the time to take advantage of it and get your credit card debt under control. A home equity loan can be used to pay off all credit debts. The payments on this second mortgage will be much lower than a credit card payment because it pays off over a longer period. If you get a fixed rate mortgage, you will know exactly what your monthly payments are, and hopefully you will be in a better position to come up with a plan to pay off your debt. A variable home equity line of credit (HELOC) may also be an option for consolidation, but shop around for interest rates. If you plan to pay off the line of credit quickly, it may be a good decision, but with rates on the rise, securing a fixed-rate second mortgage may be the best answer.
Another option is to refinance your current mortgage to collect or reduce your mortgage payments. Refinancing to an adjustable rate mortgage will save you money in the short term if you plan to sell before your rate becomes variable. Mortgage refinancing can also be used to collect your principal in a lump sum and pay off your unsecured debt.
Just be careful using your home as collateral. Remember, if you default on your loans, you could lose them. A second mortgage can help free up cash flow, but only if it restricts the use of unsecured loans. Cut your credit cards as soon as you consolidate so you’re not tempted to keep going into debt.