A debtor may be able to arrange a debt consolidation loan that will allow him to pay bills as they fall due. Although a debt consolidation loan does not eliminate any of your debt, the new loan may have a longer maturity and be at a lower interest rate than the individual debts. You need to be careful because in some cases there will be little financial advantage to you, although the person who arranges the loan may get a big commission.
WARNING: Anyone can use the name “credit counselor,” and some of these people have turned out to be incompetent and sometimes dishonest. Before you pay a counselor any money or obligate yourself to pay any fee, you need to carefully investigate their background. You also need to be careful when they recommend one big “debt consolidation loan.” They may be earning a large commission from selling the loan, and you may be no better off.
Planning Tip: Although it is hard to generalize about an individual’s debt paying ability, there are a few rules of thumb. If your total debts are under 20 percent of your assets, then you are a typical American consumer. If your debts exceed 30 percent, then you are carrying a significantly higher debt burden than the average person and you should be considering bankruptcy. If your “consumer debts” exceed one year of your family income, then you should be considering bankruptcy.