Debt settlement is made more difficult by the fact that you typically have to have a lump sum of money on hand when it’s time to settle your debts. When you make monthly payments to a debt settlement firm or you put monthly deposits into your own debt settlement account, it may take months to accumulate enough money to settle your debts. All the while, your debts get more delinquent, more fees are added, and the debt gets larger.
With Settlements, Time is Money
The longer it takes to come up with the money for a settlement, the more money you’ll probably need to save up for a settlement. For example, if your credit card balance is $8,000 at the date you last make a payment to the creditor, six months later, it could easily have grown to $8,500 or $9,000 with interest and late fees. That means you’ll end up probably settling that debt for at least $250 to $500 more than what you would have if you had enough money to settle sooner. It may not sound like much money but if you multiply it by 8-10 for that many additional debts, then it’s an extra possible $5,000 that you’ll have to come up with for debt settlement.
Settle Sooner With Home Equity
If you have home equity available, you might consider borrowing against it to help fund your debt settlement payments. You could use your home equity to consolidate your debts instead of settling, but that only works if you have enough home equity to pay off all your debts. However, when your available home equity is less than your total debt, consolidation is most likely out of the question. On the other hand, if your available home equity is 50% to 70% of your debt, using that home equity for settlement is a viable option.
Risks of Using Home Equity
Because the home equity loan will appear on your credit report, it could make it harder to settle your debts. Creditors and debt collectors have access to your credit report so they could know how much you borrowed against your home equity. They’ll likely ask how you used this money and try to get you to use it to pay off their specific debt. Be prepared for this possible question. Assuming it is true of course, tell the creditor that you had to use the home equity loan to stay afloat and you only have a certain amount that you can use to settle your debts.
Using your home’s equity to settle your debts can be a risky move. Know what you’re getting into before you do it. Realize that you’re not eliminating your debt when you obtain a home equity loan. You’ll still have monthly debt payments to make to the loan lender. Before you agree to the home equity loan, make sure you can afford these loan payments.
Settling unsecured debts with a home equity loan puts your home on the line for unsecured debt that could possibly be erased in bankruptcy. If you default on your home equity loan payments, you risk losing your home.
Making a Decision
You can settle debts without a home equity loan, but it will probably take more time. Before you go this route, make sure you weigh the consequences and be sure you can afford the loan payments before you proceed.