Often, people with serious debt will want to avoid declaring bankruptcy. Consolidating their debt from different sources, like credit cards, into one loan is a way of avoiding filing for bankruptcy. Consolidating dept will likely lower the monthly payments as well as the interest. While this is a good idea for some, it might not work for others.

Credit card debt is problematic in that it is structured in a way that the average consumer will have the debt for years. Most people make only minimum monthly payments which covers only the interest. Therefore, the total debt amount is not lowered.

In terms of home loans, homeowners frequently benefit from tax breaks. This makes it tempting to pay off credit card debt with a second mortgage or by refinancing the first mortgage. Many consumers feel that this tactic will save them money. However, this plan of action is not without risk.

Credit card debt is unsecured debt. if you do not pay the debt, the credit card company cannot take your house or other property. The case is not the same with mortgages. A mortgage is a secured debt, being secured by the value of the home. Therefore, if you do not pay your mortgage, then the bank can come take your house. If you miss several credit card payments, not much will happen. If you miss several mortgage payments in a row, then the bank can begin the process of foreclosing on your home.

Instead of putting your home at risk, you may want to take care of your credit card debt by filing for bankruptcy. Filing for bankruptcy has advantages over refinancing your mortgage to pay off debts:

  • When you file for Chapter 7 bankruptcy you are given a new lease on life. All of your credit card debt will be erased. In most cases, you can still keep your home and continue to pay your mortgage. But if you do not qualify for a Chapter 7 filing, you can still file for Chapter 13 and again have most of your credit card debt erased. Under a Chapter 13, you still get to keep your home.
  • Filing for bankruptcy will stop all collection efforts by creditors. This means no more phone calls or letters. The creditors will not be able to file a lawsuit against you and get a judgment and garnish your wages.
  • By filing for bankruptcy to take care of credit card debt, you are taking away any risk to your home. If you were to refinance your mortgage to pay off credit card debt and were then unable to pay your mortgage, the bank could foreclose on your home and take it from you.

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