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Debt Consolidation vs. Bankruptcy – Which Option is Better?

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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If you feel as if you are drowning in your debts, you may already be considering options for assistance, like one of several debt consolidation methods or filing for bankruptcy. The assistance you ultimately turn to will heavily depend on the severity of your financial situation. If you’re choosing between debt consolidation and bankruptcy, you are comparing options that vary greatly in cost, complexity and risk.

“Every possible option should be thoroughly researched, and no quick decisions should be made,” said Martin Lynch, director of education at Cambridge Credit Counseling in Agawam, Mass. “It usually takes a long time to get into debt trouble, and the process to unwind those debts should also involve patience and consideration before you commit to any option.”

What is debt consolidation and how does it work?

  • Personal loans
  • Balance transfer credit cards
  • Home equity loans
  • Home equity lines of credit

When you consolidate debts, you essentially roll multiple debts into one. A new loan or line of credit is used to pay off previous debts, leaving you to manage one monthly payment. Popular debt consolidation products include personal loans, balance transfer credit cards, home equity loans and home equity lines of credit.

Ideally, the consolidation loan will have more favorable terms than existing debts, like a lower interest rate or monthly payment. In addition, consolidating debts could help reduce the number of bills a borrower is responsible for keeping up with.

What is bankruptcy and how does it work?

  • Chapter 7
  • Chapter 13

Bankruptcy is a federal protection that helps individuals and businesses who cannot afford to repay their debts. Bankruptcy can eliminate consumer debts and may help debtors repay what they can through court-approved debt repayment plans. The law allows individuals to file for either Chapter 7 (liquidation) or Chapter 13 (repayment) bankruptcy.

Chapter 7 bankruptcy is referred to as liquidation bankruptcy because a borrower may have to sell some of their assets to pay off their debts. In Chapter 7, any of the borrower’s assets that are not exempt from sale under law may be sold by a court-appointed trustee or turned over to creditors to settle debts. Most other debts are discharged, with some exceptions (more on that in a minute).

In a Chapter 13 filing, a court approves a repayment plan that lets the borrower repay their creditors over three to five years. Any remaining amount owed on the debts will be discharged after all payments are made under the repayment plan.

Some debts, like most student loans, most tax obligations, child support, alimony and court and criminal fines are not eligible for discharge in bankruptcy.

Comparing debt consolidation and bankruptcy

Here’s a comparison of debt consolidation and bankruptcy.

Qualifications

Debt consolidation

  • A FICO credit score of at least 600
  • A low debt to income ratio below 40%
  • No recent bankruptcies

Bankruptcy

Chapter 7
You must complete credit counseling within the six months prior to filing for bankruptcy, as well as a post-bankruptcy debtor education course for debts to be discharged.

You must also pass a “means test” for eligibility:

  • Your monthly income must be below the median state income, based on family size.
  • Your disposable income isn’t enough to satisfy your debt obligations.

Chapter 13
You must complete credit counseling within the six months prior to filing for bankruptcy, as well as a post-bankruptcy debtor education course for debts to be discharged.

  • Secured debt (e.g. mortgages and auto loans) must not be worth more than $1,184,200 total
  • Unsecured debt (e.g. credit cards and medical bills) must not exceed $394,725

What debts qualify?

Debt consolidation

Existing debts such as:

  • Credit cards
  • Medical bills
  • Utility bills
  • Payday loans
  • Student loans
  • Taxes
  • Bills in collection

Bankruptcy

Chapter 7
A bankruptcy trustee or bankruptcy court liquidates nonexempt assets sufficient to repay creditors.

Chapter 7 bankruptcy may result in discharge of the following existing debt:

  • Credit cards
  • Personal loans
  • Medical bills
  • Utility bills
  • Payday loans
  • Bills in collection
  • Obligations under leases and contracts
  • Promissory notes

Certain items do not count toward your assets, including:

  • household goods
  • wedding rings
  • money in retirement accounts
  • medical supplies

Some assets are exempt under federal and state law, and exemptions vary by state. Federal bankruptcy law allows you to keep up to $15,000 of home equity and $2,400 of vehicle equity, so your home, vehicle and other assets could be protected under state or federal exemptions. But exemptions aren’t automatic — talk to a bankruptcy attorney in your area to understand what you’re at risk of losing.

Chapter 13
You can file for Chapter 13 if you have less than $394,725 in unsecured debts like credit cards and personal loans and less than $1,184,200 in secured debts like a mortgage or auto loan. Filing Chapter 13 may stop home foreclosures, though you must make timely mortgage payments during the Chapter 13 plan. You can also prevent repossession of some assets by restructuring secured-debt payments within the Chapter 13 repayment plan.

Chapter 13 bankruptcy may result in discharge of the following existing debt:

  • Credit cards
  • Medical bills
  • Utility bills
  • Payday loans
  • Student loans
  • Taxes
  • Bills in collection

A Chapter 13 bankruptcy discharge does not eliminate long-term obligations like a home mortgage. You will continue to pay the remainder of the obligation after the repayment plan ends.

Effect on credit score

Debt consolidation

You may see your credit score drop slightly, because applying for new credit generates a hard inquiry on your credit report and can shave a few points off your score.

However, you can expect your credit score to improve as you make on-time payments on your new loan.

Your credit score might actually improve in the short term if you pay off revolving debts (like credit cards) but keep the accounts open. Closing accounts lowers your credit limit, raising your credit utilization ratio — a major factor in credit scores — and in turn lowering your credit score. Not paying off debt or adding additional debt can also impact you negatively.

Bankruptcy

A study by LendingTree, the parent company of MagnifyMoney, found 43% of people with a bankruptcy on their credit file have a credit score of 640 or higher within a year of the bankruptcy, and that figure goes up to 65% two years post-filing — but you should expect your credit score to drop after filing for bankruptcy.

Bankruptcy is considered a very negative event and will cause serious damage to a filer’s credit score for as long as it remains on the credit report.

A Chapter 7 filing stays on your credit report for 10 years, while a Chapter 13 filing should fall off your report after 7 years.

The older negative information is, the less impact it will have on your credit score.

You may see accounts included in the bankruptcy filing removed from the report before the bankruptcy is removed. Any individual account that was included in the bankruptcy will be removed 7 years from its delinquency date.

The amount your score falls will vary depending on how many accounts are part of the bankruptcy and whether they were delinquent or charged off. Your credit score prior to bankruptcy also plays a factor in this — borrowers with higher credit scores prior to filing for bankruptcy can expect to see larger drops in credit score.

How it appears on your credit report

Debt consolidation

Balances on consolidated debts will decrease or be marked as paid off, and a new loan will be added to your credit report.

Bankruptcy

Chapter 7
Bankruptcy will drop off your credit report 10 years from the filing date. Accounts included in the bankruptcy will be removed 7 years from their delinquency dates.

Chapter 13
Bankruptcy will drop off your credit report after 7 years from the filing date. Accounts included in the bankruptcy will be removed 7 years from their delinquency dates.

Length of process

Debt consolidation

The time frame varies from several months to several years, based on the term of the debt consolidation loan.

Bankruptcy

Chapter 7
The entire process may take up to six months to complete.

Chapter 13
The legal process may take several months; the repayment period will last three to five years.

Cost

Debt consolidation

You will have to pay interest on your new loan, and rates vary widely by loan type.

Some personal loans may charge fees such as:

  • Loan origination fee
  • Prepayment fee
  • Loan credit insurance

Credit card companies may charge a fee to make a balance transfer between credit cards. A 3% balance transfer fee is common. With a balance transfer credit card, you may be able to transfer credit card debt to a card with a 0% APR on balance transfers for a limited time, but if you don’t pay off the balance during the 0% APR intro period, your debt may begin to accrue interest.

There may be fees associated with a HELOC or home equity loan such as:

  • An appraisal fee, to gauge the current value of the property
  • Application costs
  • Processing fees
  • Miscellaneous lender fees
  • Cancellation fee
  • Inactivity fee

Bankruptcy

Chapter 7

  • Filing fee: $245
  • Administrative fee: $75
  • Trustee fee: $15
  • Attorney: varies
  • Pre- and post-bankruptcy credit counseling/debtor education courses: about $50-$100 each

Chapter 13

  • Filing fee: $235
  • Administrative fee: $75
  • Convert Chapter 13 to Chapter 7: $25
  • Attorney: varies
  • Pre- and post-bankruptcy credit counseling/debtor education courses: about $50-$100 each

Generally, interest is not paid on unsecured debts. Interest on secured debts are paid through the Chapter 13 plan. How bankruptcy courts determine that rate varies by state, but the Supreme Court case Till v. SCS Credit Corp. provided guidance that the rate can be calculated as the prime rate plus 1.5%.

Tax consequences

Debt consolidation

None.

Bankruptcy

If you are owed a tax refund, the money may be delayed or the funds may be turned over to trustee.

Discharged debt is taxable as income, so if you have debts discharged you may need to set aside funds to pay the tax when the time comes.

Benefits

Debt consolidation

  • Avoid severe credit damage.
  • Improve your credit score over time.
  • There’s no risk of losing personal property with a personal loan or balance transfer credit card.
  • It may be easier to qualify for than bankruptcy.

Bankruptcy

Chapter 7

  • You can have most unsecured and secured debts discharged quickly, within 4 to 6 months.
  • You may not have to pay back the entire amount of what you owe.
  • By law, collections efforts have to stop.
  • Under state and federal law, you may be allowed to keep certain exempt property.

Chapter 13

  • You can pay back some of what you owe to creditors over 3 to 5 years.
  • Your remaining debts are discharged after completing the 3- to 5-year repayment plan.
  • You may not have to pay back the entire amount of what you owe.
  • Make one installment payment to a trustee, instead of managing multiple debts.
  • Save property like a house headed to foreclosure or vehicle about to be repossessed.
  • Save assets that would otherwise be sold in a Chapter 7 filing.
  • It may allow you to catch up on delinquent mortgage payments over time.
  • By law, collections efforts have to stop.
  • It protects cosigners from liability on consumer debts.
  • It may lower the monthly payment on secured debts.

Risks

Debt consolidation

Bankruptcy

Chapter 7

  • Because of the credit score damage caused by bankruptcy, you risk not being able to qualify for credit when you need it, particularly in the first few years after declaring bankruptcy.
  • You risk losing assets not protected by exemption (consult with an expert about what’s applicable for exemption in your state).
  • You must wait 2 years to take out an FHA mortgage and 4 years for a conventional mortgage.
  • You may face issues renewing professional licensing.
  • Cosigners are not protected in a Chapter 7 filing, so creditors can still go after them and can sue for payment.

Chapter 13

  • Because of the credit score damage caused by bankruptcy, you risk not being able to qualify for credit when you need it, particularly in the first few years after declaring bankruptcy.
  • You must wait 2 years to take out an FHA mortgage and 4 years for a conventional mortgage.
  • You may face issues renewing professional licensing.

Life after debt consolidation or bankruptcy

Be prepared to make some life changes after consolidating your debts or declaring bankruptcy.

Debt consolidation

After you’ve consolidated your debt, your focus should be on paying it off. If you’ve consolidated credit card debts, try to not rack up debt again on the credit cards.

You can build your credit score by adding positive information to your credit report. Paying your bills in full and on time can help both keep your credit utilization low and establish a record of on-time payment history. Together, those factors comprise 65% of your FICO score. Your utilization is the overall percentage you use of your available revolving credit, and experts recommend keeping that figure below 30%. Your on-time payment history makes up 35% of your credit report and demonstrates you can manage your debt payments.

Making and following a budget can help prevent you from piling up more debt. It would be wise to start saving some amount of money in an emergency fund, as it may keep you from turning to high-cost debt when you encounter unexpected costs. Experts recommend you save enough to cover three to six months’ worth of fixed expenses.

Bankruptcy

Having the bankruptcy on your credit report will weigh down your credit score for a while, but the process also gives you a fresh start.

“Filing for bankruptcy can devastate a score, but that’s not the focus of the consumer’s decision at that point — discharging debt is,” said Lynch. He adds most filers have at least some credit offers soon after filing, although they may not receive the best rates.

You can rebuild your score over time by adding positive information to your credit history, like on-time payments, and using very little of your available credit. If you need an idea of where and how to start rebuilding, LendingTree has tips on rebuilding your credit after filing bankruptcy, here.

The same advice as debt consolidation stands as far as managing your cash: You should create and follow a budget, as well as establish an emergency fund so that you don’t find yourself in a similar situation a few years down the road.

How to decide which option is better

When debt consolidation makes sense over bankruptcy

Debt consolidation may be a more attractive option compared to bankruptcy if you have a reasonably good credit score and can pinpoint the root of why you got into debt in the first place. If it was a one-off incident like a job loss or medical issue that forced you to rack up debt, or you’ve recently kicked poor spending habits that got you into debt, you may be able to use a debt consolidation loan to finally get back on track.

A good credit score will help you qualify for a debt consolidation loan at a lower interest rate, making it less expensive overall for you to pay off your debts. The better your credit score, the more debt consolidation options you have.

But if you haven’t resolved the issue that got you into debt in the first place, debt consolidation can be risky.

When bankruptcy makes sense over debt consolidation

Lynch recommended speaking with a credit counselor or a bankruptcy attorney to evaluate your options if the amount of unsecured debt you’re responsible for exceeds about 20% of your income. But the decision to file bankruptcy ultimately comes down to an individual’s capacity for disciplined repayment.

“The best candidates for bankruptcy are those consumers who know what the consequences will be, know what property they may stand to lose — in the case of a Chapter 7 filer — and have done their best to determine what the 3 to 5 years of repayment would be like if they were to file Chapter 13,” said Lynch.

Consider your debts

Jeffrey Arevalo, an financial wellness expert at Greenpath Financial Wellness, recommended you consider your income, the types of debt you have and your assets in deciding if bankruptcy is right for you — and, if so, which type of bankruptcy you would need to file.

According to Arevalo, you should consider whether bankruptcy can help you with the kind of debt you’re dealing with in the first place; there are some debts, including student loans, child support, alimony and tax debts, that won’t be eligible for discharge in either a Chapter 7 or Chapter 13 filing.

Consider your assets

The assets you own may affect whether or not you opt for bankruptcy over debt consolidation, too. You may risk losing certain assets like secondary residence properties, valuable vehicles and other assets that aren’t exempt for sale under applicable state and federal law to pay off your debts if you file Chapter 7 bankruptcy. The rules vary by state, so check first to see what you’d risk losing if you file for Chapter 7.

On the other hand, a benefit of filing for Chapter 13 bankruptcy is that it gives you an opportunity to save your home from foreclosure or a car from repossession, if that’s a risk you’re facing.

Eligibility

Finally, filing would depend on whether or not you are eligible for bankruptcy.

“Based on bankruptcy guidelines in your state, if you make too much or too little of income it will determine whether or not you have the ability or inability to repay your debt,” said Arevalo.

To be eligible for Chapter 13 bankruptcy you must first:

  1. Have regular income
  2. The amount of secured debt (like a mortgage or auto loan) cannot be more than $1,184,200, and the amount of unsecured debt (like medical bills or credit card debt) cannot exceed $394,725

To be eligible for Chapter 7 bankruptcy you must prove you cannot afford your debt payments. To do so you must:

  1. Prove your monthly income is less than the median income in your state for your family size
  2. If you don’t pass the first requirement, the court will use another complex calculation to see whether your disposable income is enough to satisfy your debt obligations

Student loans

Filing for either type of bankruptcy won’t result in your student loans being discharged in most cases, according to the experts.

“Contrary to popular belief, both federal and private student loans can be discharged in bankruptcy, but the standards applied most often — the so-called ‘Brunner test’ — are difficult for many people to satisfy,” said Lynch.

To have student loans discharged, you have to file an adversary proceeding, a lawsuit filed in bankruptcy court. That’s when you have to pass what’s commonly referred to as the Brunner Test, meaning you must prove repayment would “impose undue hardship on you and your dependents.”

The following factors determine undue hardship:

  • Repaying the loan would not allow you to maintain a minimal living standard.
  • Evidence shows that the hardship will likely continue throughout much of the loan’s repayment period.
  • Good faith efforts were made towards loan payment prior to the bankruptcy filing.

The chances of any individual borrower passing the test are slim, according to John Colwell, president of the National Association of Consumer Bankruptcy Attorneys.

“You can sue and try to prove a hardship discharge in bankruptcy but the burden of proof on the debtor is very high,” Colwell said. On top of that, Colwell told MagnifyMoney, the process is an additional expense for an already cash-strapped debtor, who would have to pay a lawyer to file the lawsuit and combat an aggressive opposition from the student loan companies.

In February 2018, the U.S. Department of Education announced it would review the undue hardship definition, but, according to Lynch, “it’s even debatable whether that would have any real effect, as actual changes would have to come via Congress.”

Statute of limitations
Borrowers who have private student loans should remember private loans are generally subject to a state’s statute of limitations, Lynch added.

“If the statute has expired, there may be no need to include the loans in a bankruptcy filing,” said Lynch. He advised anyone considering bankruptcy with private loans to first speak with an experienced bankruptcy attorney who has had success with discharging student loans.

Repayment options
Student loans likely won’t be discharged in either type of bankruptcy. However, if you opt to file for Chapter 13 bankruptcy, the repayment plan may reduce your payment to something more manageable for your budget — or you may have no payment at all for three to five years as you pay down your debts.

If you have federal student loans and are struggling to make payments, it may be beneficial to contact your loan servicer and ask about forbearance, deferment or your eligibility for one of several repayment plans. Some private student loan companies offer similar options.

The bottom line

Understanding your mix of assets and and passing the eligibility test doesn’t necessarily mean bankruptcy is the best option for you over debt consolidation. And owning a house or having the credit score to qualify for a balance transfer credit card or personal loan doesn’t mean you should consolidate your debt.

If you understand the differences but are struggling to make up your mind or having trouble understanding your options, you should contact a professional. Lynch recommended speaking to multiple financial professionals, including a credit counselor or bankruptcy attorney, and weighing their recommendations before making a final decision.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Brittney Laryea
Brittney Laryea |

Brittney Laryea is a writer at MagnifyMoney. You can email Brittney at brittney@magnifymoney.com

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The Ultimate Guide to Bankruptcy – Chapter 7 & 13

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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During the peak of the financial crisis that started in 2007, bankruptcy was considerably more common than it is today. During the 12-month period that ended in September 2010, a shocking number of bankruptcies — 1.6 million — were filed.

In the year that ended March 31, 2018, annual bankruptcy filings totaled 779,828. That’s a 1.8 percent drop from the year prior, noting an ongoing decline in bankruptcies since 2010.

Fewer bankruptcies is good news for consumers and the economy, but not everyone is so lucky. Due to financial issues such as job loss, divorce, and chronic overspending, many consumers still opt for bankruptcy as a solution to their money problems.

This guide was created to help explain the different types of bankruptcy, how the process works and the type of consumer who would benefit most from the debt resolution that bankruptcy provides. If you’re considering bankruptcy to get your finances back on track, keep reading to learn more.

What is bankruptcy?

Bankruptcy is a process that helps consumers liquidate assets to pay off their debts when they can no longer manage them on their own. The process is outlined in Article 1, Section 8 of the U.S. Constitution. The Bankruptcy Code, which was enacted by Congress in 1978, is the uniform federal law that governs all bankruptcy cases in the U.S.

Besides consumer bankruptcy, bankruptcy laws also protect businesses that are struggling financially. The types of bankruptcy available to consumers, Chapter 7 and Chapter 13, help debtors resolve delinquent debts and shore up their finances, although they work in different ways.

While bankruptcy can result in the loss of personal property and assets through liquidation, it is often the best choice for consumers:

  • After a Chapter 7 bankruptcy, consumers are often able to enjoy a fresh start that is free from unsecured debts that previously plagued their finances.
  • After a Chapter 13 bankruptcy, consumers are typically able to begin repaying a percentage of what they owe and get back on track financially.

When should you file for bankruptcy?

While many consumers struggle to pay unsecured debts, bankruptcy is a solution intended for the most extreme cases — cases where families cannot get out of debt any other way. If a debtor has the financial means to repay their debts and gain a fresh start on their own, bankruptcy attorneys would likely counsel them on other options, such as meeting with a credit counselor and starting a debt management plan.

Yet there are plenty of cases when bankruptcy is the best option despite its consequences. For the most part, it makes sense to file for bankruptcy under the following circumstances:

  • You cannot pay down your debt on your own and you continue falling further and further behind. “It makes sense to file bankruptcy when you can no longer keep up with your bills,” said Leslie H. Tayne, a debt resolution attorney and founder of Tayne Law Group, based in Melville, N.Y. “If commercial creditors are breathing down your neck or if you are in danger of losing your home, it may then make sense to file bankruptcy.”
  • You have no real property and want to discharge your debts. While Chapter 13 bankruptcy requires you to reorganize your debts and pay them off, Chapter 7 bankruptcy allows you to discharge debts completely. For that reason, bankruptcy attorney Barry J. Roy of Rabinowitz, Lubetkin & Tully LLC in Livingston, N.J., said Chapter 7 makes sense when you don’t have many assets but desire to discharge your unsecured debts.
  • You are struggling with unsecured debts and don’t want to lose your home. Roy said Chapter 13 makes sense for consumers who need some help with their debts but have considerable equity in their homes they want to protect.

According to Kim Cole, community engagement manager at credit counseling agency Navicore Solutions, bankruptcy can make sense when life circumstances cause people’s finances to spiral out of control. Very often, she said, her company works with consumers who have racked up insurmountable amounts of medical debt that they couldn’t pay off if they tried. Other times, bankruptcy is the result of job loss or another unintended loss of income.

Insurmountable amounts of credit card debt can also be helped with bankruptcy, particularly when the consumer has so much debt that they cannot keep up with the payments and keep a roof over their head.

On the flip side, there are plenty of times it doesn’t make sense to file bankruptcy. For example:

  • Your debt doesn’t qualify for bankruptcy. Not all types of debt qualify for bankruptcy, which is why it’s not a solution for everyone. Cole said her company receives many inquiries about student loan debt because many people don’t realize student loan debt is not dischargeable in bankruptcy. Other types of debt that do not qualify for bankruptcy include alimony, child support, most taxes and debts resulting from fraud.
  • You have too many assets. Chapter 7 bankruptcy has a means test you must pass to qualify. If you earn too much, you may not be eligible. Chapter 13 bankruptcy also has a limit on the amount of assets you can have to qualify.
  • You can afford to pay down your debts. Cole said some families are better off with a debt management plan and credit counseling, provided they have the financial means to repay debt on their own.
  • The root cause of your debts hasn’t been settled.Florida consumer protection lawyer Donald E. Petersen said consumers should not file bankruptcy until the root cause of their financial distress is solved. “If a consumer has severe health problems and is incurring medical bills that they are unable to pay, do not file bankruptcy until after the course of treatment is complete,” he said. “Similarly, consumers who are unable to pay their bills because they are unemployed or underemployed should not file bankruptcy until their employment status has stabilized at compensation that they can live on without accumulating additional debts in order to meet ordinary living expenses.”

Chapter 7 vs. Chapter 13: What’s the difference?

The two most common types of bankruptcy — Chapter 7 and Chapter 13 — work differently to help consumers recover from too much debt. The charts below outline how each process works and why these two types of bankruptcy are geared at different consumers:

Chapter 7 Chapter 13

Length of process

If you filed for Chapter 7 bankruptcy today, your meeting of creditors would be filed in three to four weeks. At this meeting, you will meet with your trustee.

“You can’t get your discharge until 60 days after that meeting,” Roy said. For that reason, Chapter 7 bankruptcy typically takes three to six months.

Chapter 13 bankruptcy is more complicated than Chapter 7 bankruptcy since it requires you to restructure your debts. This type of bankruptcy requires you to make a court-approved repayment plan to show how you will pay off your debt within the next three to five years.

Fees

With Chapter 7 bankruptcy, the courts levy several charges — a $245 case filing fee, a $75 miscellaneous administrative fee and a $15 trustee surcharge. You will also have to cover the costs of court-required credit counseling before and after you file, which will cost $50 to $100 per session.

Finally, you will likely need to hire an attorney to oversee your case. Attorney fees for Chapter 7 bankruptcy can vary widely depending on where you live, but can range from $800 to $5,000.

With Chapter 13 bankruptcy, the courts levy several charges — a $235 case filing fee and a $75 miscellaneous administrative fee. You will also have to cover the costs of court-required credit counseling before and after you file, which will cost $50 to $100 per session.

Since Chapter 13 bankruptcy is more complex and takes longer, attorney fees may be on the higher end of the scale (up to $5,000 and potentially more).

Types of debt forgiven

When you file for Chapter 7 bankruptcy, you have what is called “pre-filing debt” and “post-filing debt.” Pre-filing debt is debt you racked up before you filed for bankruptcy, whereas post-filing debt is debt you racked up since you filed. With Chapter 7 bankruptcy, only eligible pre-filing debt can be included.

Debts that can be included in a Chapter 7 bankruptcy are of the unsecured kind, meaning they are not secured with collateral. Debts that can qualify include but are not limited to:

  • Credit card debt, including late fees and interest charges

  • Accounts in collections

  • Medical bills

  • Personal loans

  • Utility bills that are past due

  • Auto accident claims that aren’t a result of drunken driving

  • Money owed under lease agreements, including past-due rent

  • Civil court judgments, provided they are not the result of fraud


Chapter 13 bankruptcy allows you to restructure your debts and catch up on late payments for secured assets. With that in mind, some of the debts that can be forgiven may only be partially forgiven through the Chapter 13 bankruptcy process.

Debts that can qualify for Chapter 13 bankruptcy include but are not limited to:

  • Credit card debt, including late fees and interest charges

  • Accounts in collections

  • Medical bills

  • Personal loans

  • Utility bills that are past due

  • Auto accident claims that aren’t a result of drunken driving

  • Money owed under lease agreements, including past-due rent

  • Civil court judgments provided they are not the result of fraud

  • Debts incurred through a property settlement agreement in divorce or separation proceedings

  • Outstanding debts from a prior bankruptcy if the court denied your discharge

  • Loans against a retirement account

  • Homeowners association or condominium fees


Eligibility requirements

To qualify for Chapter 7 bankruptcy, you must have little disposable income. A means test is applied that compares your income to the median income in your state. If your average monthly income for the six-month period leading up to your bankruptcy filing is less than the median income for the same household size in your state, you automatically qualify.

If your income is above the median, an additional means test is applied that deducts specific monthly expenses from your average monthly income over the previous six months. If you can prove you have little to no disposable income after repaying your debts, you may qualify for Chapter 7 bankruptcy.

To be eligible for Chapter 13 bankruptcy, you must reside in or own property in the U.S., have a regular income and have unsecured debts of less than $394,725. You must also have secured debts of less than $1,184,200.

Individuals are ineligible for Chapter 13 bankruptcy if, in the 180 days prior, the debtor had a bankruptcy case dismissed by the court. You must also receive credit counseling from an approved credit counseling agency within 180 days before filing Chapter 13 bankruptcy.

Credit impact

Roy said Chapter 7 bankruptcy is the “absolute worst thing you can do to your credit score.” But he also notes that if your debts are considerable enough and your income is so low that you cannot keep up, it could still be the best option for you.

Also note that a Chapter 7 bankruptcy will stay on your credit report for 10 years. Chapter 7 bankruptcy could also lower your credit score significantly (up to 200 points) at first.

Chapter 13 bankruptcy stays on your credit report for seven years. You may also see your credit score drop up to 200 points once you file.

Roy notes that Chapter 13 bankruptcy is also catastrophic for your credit score, but that you may be able to rebuild credit quickly with smart financial management.


What happens to your assets

Each state has a set of exemptions that apply in Chapter 7 bankruptcy. This set of exemptions and limits determines which assets you can keep once your bankruptcy has been completed.

These exemptions vary by state but typically let you keep a certain amount of personal property, automobiles up to certain limits and some level of equity in your home.

Your remaining assets will be sold as part of the Chapter 7 bankruptcy process. The monies raised will be used to satisfy part of your debt with your creditors.

With Chapter 13 bankruptcy, you are able to keep all your property. But you will need to restructure your debts and make payments toward some of the amounts you owe.

Chapter 13 bankruptcy also allows you to “exempt” some of your personal property, such as some of the equity you have in your home. But you will typically wind up paying an amount toward your debts that is equal to your nonexempt assets.

This process may allow you to discharge some debts while also staying in your home.

What happens to your debts

With Chapter 7 bankruptcy, most of your unsecured debts will be forgiven and discharged. But note that many debts — such as student loans, child support or alimony — do not qualify.

With Chapter 13 bankruptcy, your debts are restructured and a payment plan is conceived. The payment plan may offer some relief of your debts, meaning you may not have to pay back 100% of what you owe.

Which type of bankruptcy is right for me?

Both types of bankruptcy can be helpful for consumers struggling with debt, but the eligibility requirements for Chapter 7 bankruptcy make it so you will likely need to file Chapter 13 bankruptcy if your income is too high or you have significant assets.

With that in mind, here are some examples of when each type of bankruptcy might be best.

Chapter 7 may be best if …

  • Your income is low enough to qualify. Roy said that if someone has modest or low earnings and significant credit card debt they can never pay off, Chapter 7 bankruptcy can make sense. “It depends on their financial situation, income and debts,” he said.
  • You do not have significant assets or equity to protect. “People file Chapter 7 bankruptcy because they have no real property and want to discharge their debts,” Roy said.

Chapter 13 may be best if …

  • You have significant assets you want to keep. “You’re going to file a Chapter 13 if you have equity in real or personal property you want to keep,” Roy said. “Usually people file Chapter 13 because they want to continue living in their own home.”
  • You have enough income to repay some or all of your debts. Because Chapter 13 restructures most of your debts instead of discharging them, you need adequate income to be able to repay some of your debts.

How to file Chapter 7 bankruptcy

If you decide Chapter 7 bankruptcy is your best option, here are the steps you’ll take along the way.

Step 1: Gather all bills and financial information.

You’ll need documentation of your debts, your tax returns and your monthly bills before you move on to the next step.

Step 2: Receive mandatory credit counseling.

If you are a candidate for Chapter 7 bankruptcy, you will need to complete mandatory pre-filing credit counseling with an approved credit counseling agency. During this step, a credit counselor will go over your income, debts and regular bills to determine your best options, including alternatives to bankruptcy. The cost of this type of credit counseling session is typically $50 to $100.

Step 3: You will need to meet with a bankruptcy attorney.

Tayne recommends doing some research on attorney options ahead of time, including reading reviews and meeting with more than one to find the best one for you. Once you meet with an attorney, they will go over your financial information and debts and advise you on your next best steps.

Step 4: File for bankruptcy with your attorney.

Once you have completed credit counseling, you can start your bankruptcy case with your attorney. This involves filing a packet of forms with the local bankruptcy court. Required forms include the bankruptcy petition, forms for your financial information, a list of your income and expenses, and proof you have passed the Chapter 7 means test. You will also list your property exemptions based on limits in your state.

With Chapter 7 bankruptcy, you need to pay several charges upfront — a $245 case filing fee, a $75 miscellaneous administrative fee and a $15 trustee surcharge. You will also need to negotiate attorney fees and payment, which can vary widely depending on your unique case details and where you live.

Once you have taken this step to file for bankruptcy and your case is ongoing, creditors can no longer take collections actions against you.

Step 5: Your trustee works on your behalf.

Once your Chapter 7 bankruptcy is underway, a trustee takes over your case and begins reviewing your paperwork.

Step 6: You will have a meeting of creditors, also called a “341 meeting.”

After you begin the initial bankruptcy proceedings, you’ll receive a notice from the court about your meeting of creditors. You will need to be present at this meeting to answer questions from the trustee and any creditors who may be present at the meeting.

Step 7: You are determined eligible for Chapter 7 bankruptcy.

If the trustee deems you are eligible for Chapter 7 bankruptcy, you can move forward with Chapter 7 bankruptcy protection. If you are deemed ineligible for Chapter 7 bankruptcy due to your income or income-to-expenses ratio, you may have the option to file for Chapter 13 bankruptcy instead.

Step 8: Your trustee deals with nonexempt property, and you must also deal with secured debts.

If you have assets or property that is above the exempted amounts in your state, the trustee is charged with deciding which assets to seize and sell. Monies resulting from the sale of this property will be used by the trustee to satisfy some of your creditors.

If you have debts backed by collateral — such as an auto loan that is secured by a car — you must give it back, pay the creditor what it’s worth or reaffirm the debt. Reaffirming your debts is a process where you agree that you still owe an amount after your bankruptcy case is over.

Step 9: Take a credit counseling course.

Once your Chapter 7 bankruptcy case has been filed (but not discharged), you must complete a second credit counseling education course. This course may cost $50 to $100.

Step 10: Bankruptcy is over.

Once you file for Chapter 7 bankruptcy, it can take three to six months to receive your discharge. Your bankruptcy case will be closed now.

How to file Chapter 13 bankruptcy

Step 1: Gather all bills and financial information.

Pull together a packet of documentation that includes information on all your debts, your tax returns and your monthly bills.

Step 2: Receive mandatory credit counseling.

If you are a candidate for Chapter 13 bankruptcy, you will need to complete mandatory pre-filing credit counseling with an approved credit counseling agency. The cost of this type of credit counseling session is typically $50 to $100. During this meeting, a credit counselor will go over your finances, including your debts and your income, to counsel you on your options.

Step 3: You will need to meet with a bankruptcy attorney.

Conduct some research on attorneys ahead of time. Read reviews online and consider meeting with more than one attorney in your area. Your bankruptcy attorney will help put together the forms required to file Chapter 13. This includes a bankruptcy petition, debt and income schedules, and a Chapter 13 repayment plan you have worked on with your attorney to create.

You will also need to pay several court fees at this time, including a $235 case filing fee and a $75 miscellaneous administrative fee. Attorney fees are additional and may vary. Since Chapter 13 bankruptcy is so complex, it can cost up to $5,000 or more for attorney assistance.

Step 4: Get matched to a court-appointed trustee.

Your bankruptcy trustee will oversee your case and review your debt repayment plan. They will also collect payments on this plan once it’s underway, along with distributing funds to your creditors.

Step 5: Receive an automatic stay.

Once your bankruptcy is underway, an automatic stay will be in effect. This process stops creditors from pursuing collections actions against you.

Step 6: Begin your repayment plan.

Begin making monthly payments on your debt repayment plan within a month after you file for Chapter 13 bankruptcy.

Step 7: Attend a meeting of creditors.

You will receive notice about your meeting of creditors (or “341 hearing”) around a month after you file for bankruptcy. During this meeting, your trustee and any creditors that are represented will ask you questions about your income, your debts, and your monthly expenses.

Step 8: Attend a confirmation hearing for your bankruptcy.

Either you, your attorney or both of you will need to attend a court confirmation hearing. During this hearing, any objections from creditors or your trustee will be mentioned. Ideally, you will leave your confirmation hearing with your debt repayment plan and bankruptcy confirmed.

Step 9: File proofs of claim or object them.

During the Chapter 13 bankruptcy process, your creditors file proofs of claim that list debts owed with the goal of getting paid. You can either object proofs of claim that may be inaccurate or file proofs of claim so that you can pay a debt as part of your case.

Step 10: Begin debt repayment and meet with a credit counselor again.

Once your Chapter 13 bankruptcy is underway, you will make debt payments to your trustee according to your plan. You will also need to complete your second meeting with a credit counseling agency at an average cost of $50 to $100.

Step 11: Your bankruptcy case ends.

Most Chapter 13 bankruptcy cases take three to five years from start to finish. During that time, you will continue making debt payments until your plan is complete. At that time, the court will grant a discharge of your Chapter 13 bankruptcy.

Life after bankruptcy: 3 tips to recover

Bankruptcy may be a drastic solution to debt and income issues, but it is often the only way for consumers to get a fresh start. Roy implores you to consider what bankruptcy could mean to someone who is truly struggling.

“If you walked in here and told me you had $60,000 in credit card debt and you were only making minimum payments half the time and only make $20,000 per year, there’s no way you’re ever going to be able to pay off that debt,” he said.

The best thing you can do is file bankruptcy and discharge your debts so you can get a fresh start. “Otherwise, you’re just going to linger in credit card debt hell for years,” he said. “Better off to bite the bullet and file for bankruptcy so you can move on.”

Still, that “moving on” part can be difficult for consumers. Here are some tips that can help you recover from bankruptcy and get on better financial footing:

1. Listen closely to advice offered in your credit counseling sessions.

When you meet with a credit counselor before and after you file bankruptcy, you will receive counseling on how to improve your finances in the future. Take these lessons to heart and find ways to lower your expenses so that you are less likely to get in financial trouble in the future.

2. Strive to build a lifestyle without credit or debt.

Try to build a lifestyle that is less reliant on credit and debt. Believe it or not, many card issuers will grant you a credit card within months after your bankruptcy is discharged. It is up to you to fight off the temptation to borrow so that you can avoid getting back into debt.

3. Start using a monthly budget.

Try writing down all your monthly bills and expenses and estimating variable categories, such as food and entertainment. Set limits on how much you can spend and make sure you’re designating some of your monthly income toward savings and investments. Building up a reasonable emergency fund can also help you avoid debt in the future.

Frequently asked questions (FAQs)

These frequently asked questions and answers can help you learn more about filing Chapter 7 and Chapter 13 bankruptcy.

Filing for Chapter 7 or Chapter 13 bankruptcy can cause immediate damage to your credit score, often resulting in a loss of up to 200 points. But your credit score may have already been damaged due to late payments and other financial issues leading up to your bankruptcy filing.

Chapter 7 bankruptcy stays on your credit report for up to 10 years, while Chapter 13 bankruptcy stays on your credit report for up to seven years. Both types of bankruptcy will cause damage to your credit score.

Chapter 13 bankruptcy requires a $235 case filing fee and a $75 miscellaneous administrative fee, plus attorney costs. Chapter 7 bankruptcy comes with a $245 case filing fee, a $75 miscellaneous administrative fee and a $15 trustee charge, as well as attorney charges. With both types of bankruptcy, you are also required to pay for two credit counseling sessions that cost $50 to $100 each.

Both Chapter 7 and Chapter 13 bankruptcy can allow you to keep your house if requirements are satisfied. Chapter 13 bankruptcy is especially popular with homeowners who have considerably equity since it allows them to stay in their home and continue making payments while they pay off all, or a portion of, their other debts through a repayment plan..

Both Chapter 7 and Chapter 13 bankruptcy require you to go through credit counseling before and after you file. These sessions cost between $50 and $100 depending on the credit counseling agency with which you work, and they are mandatory.

You must reside in or own property in the U.S., have a regular income and have unsecured debts of less than $394,725 to qualify for Chapter 13 bankruptcy. You must also have secured debts of less than $1,184,200. You must not have had a bankruptcy case dismissed in court for 180 days before filing.

If your average monthly income for the six-month period leading up to your bankruptcy filing is less than the median income for the same-size household in your state, you automatically qualify. If your income is above the median, you must pass an additional means test that compares your income to specific monthly expenses to prove you have little to no disposable income.

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Fair Debt Collection Practices Act: Understanding Your Rights

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Falling behind on debt payments can be stressful, and the last thing anyone wants is a barrage of calls or letters from a debt collector threatening repercussions if you don’t pay up now. While companies do have the right to ask consumers to pay their bills, there are government rules in place to keep debt collectors from unduly harassing you.

Calls from unscrupulous debt collectors can be frightening and unsettling. Before engaging with anyone who contacts you claiming that you owe money, it’s important to know your rights. Often, debt collectors may be lying or breaking federal law.

What is the Fair Debt Collection Practices Act?

The Fair Debt Collection Practices Act (FDCPA), a federal law that was passed in 1978, provides guidelines on the actions that debt collectors can take when they try to get consumers to make payments on their debts. It prohibits abusive, deceptive or unfair practices and puts limits on when and how third-party debt collectors can contact people who owe money.

The FDCPA covers the collection of credit card, mortgage and medical debt, as well as debts from household, personal or family purposes, including student loans and auto loans. The FDCPA does not cover business debt or debts for agricultural purposes.

In-house collection versus third-party collection

One important aspect of the FDCPA is that it only applies to third-party collections. That means that the company where the debt originated, such as a bank or credit card company, does not have to abide by FDCPA rules when collecting debt.

But original creditors typically don’t collect their own debt or sue people who owe them money because it would make them look bad, said Ira Rheingold, executive director of the National Association of Consumer Advocates. Instead, these companies hire someone else — a third-party collection agency — to do it for them.

“It’s reputational,” Rheingold said. “If you are a credit card company, do you really want your name on all these lawsuits?”

If a debt collector contacts you, they likely are working for a third party such as a debt buyer or a debt collection agency. Some of these companies buy past-due debts, often at pennies on the dollar, and then use abusive means to try to collect the debt.

5 illegal debt collector practices

What debt collectors CAN do

What debt collectors CAN’T do

Call, email or send letters and texts

Harass you or anyone else with obscene language, lies or threats of violence

Contact you and your spouse

Contact you at work or call your employer

Contact other people once to get your address, home phone number and employer name

Claim to be attorneys, federal officials or government agents

Threaten to take your property if the process would be legal

Threaten consumers with postdated checks

Call you during the day at a convenient time

Contact you at an inconvenient time or between 9 p.m. and 8 a.m.

The bottom line is that third-party collectors are allowed to contact you within the FDCPA’s guidelines if you owe money. But if their behavior breaks the law, which includes threatening to call your grandma or your neighbor about your debts, you have recourse.

How to stop debt collector calls and letters

If you get a call from a debt collector, do not engage with them. That means do not give them personal or financial information, no matter how forcefully they ask. Instead, here’s how to handle unwanted calls and letters.

1. Be brief

It’s important to make calls short, but make sure you get some important information before you hang up. Tell the debt collector you want verification of your debt in writing. “Say to them, ‘I don’t believe I owe this debt. What proof do you have?’” Rheingold said. By law, the debt collector is required to tell you:

  • The creditor’s name
  • The amount you owe
  • That you can dispute the debt
  • That you can ask for the original creditor’s name and address

The debt collector is required to send you the information within five days of the initial contact.

While it can be tempting to try to negotiate over the phone with a debt collector, Rheingold recommended proceeding with caution, and don’t fall for a debt collector’s argument that you have a moral obligation to pay your debt.

Often, debt collectors pile exorbitant fees on top of the amount you owe. “Be very careful,” Rheingold said. “Oftentimes, it’s just throwing good money after bad.”

2. Get their information

Ask the caller for their company’s name and mailing address. If you receive a letter, save the return address.

3. Send a letter

Send the debt collector a letter by certified mail telling them to stop contacting you, and keep a copy for your records. This letter will trigger FDCPA rules that require the debt collector to leave you alone.

Keep in mind, however, that a letter will not magically banish a third-party debt collector. They are still legally allowed to contact you to confirm there will be no further contact or to notify you of any actions it can legally take, including a lawsuit or reporting negative information to a credit reporting company.

What to do if a debt collector does something illegal

If a collector contacts you, they could be breaking the law as they try to get you to repay debts. Rheingold said one common fraud is debt collection companies buying past-due debt for extremely low prices at “debt auctions” and then trying to collect it. Often, the debt collection company only has a little information about the debtor and no information about the actual debt. If you don’t pay, however, they may try to take you to court.

“They use our court system to collect debts when the debt is not provable,” Rheingold said. “They don’t have the original contract or accounting of how much money is owed. They will say you owe money, and if you don’t pay it, they sometimes will sue you.” If you don’t show up in court, the debt collector may get an easy win.

If you think a debt collector is doing something illegal, here are some options:

  1. Call yourstate attorney general’s office. Many states have additional laws about debt collection practices that may apply to original creditors and fraudulent lawsuits, and the office can give you details about your state’s laws.
  2. File a complaint with the Consumer Financial Protection Bureau (CFPB) online or by calling 855-411-2372.
  3. Talk to an attorney who specializes in debt collection. Attorneys can investigate whether a debt collector is breaking state or federal law and whether the claim is valid, defend you in court against a fraudulent lawsuit and respond to legal summons for you. You can get representation through a nonprofit legal aid clinic (where legal services are free), pro bono clinics at courthouses or private attorneys.

Debt collection: FAQs

Personal debts typically are considered delinquent after you miss the first payment, and if you don’t make any payments for six months or respond to the original lender’s collection efforts, the lender may turn the debt over to a third-party debt collection company.

At this point, you may start receiving letters, emails and phone calls to get you to make payments on the debt. Third-party debt collectors typically will try these tactics for about 90 days, and then they may sue you or sell your debt to another collection company.

Yes. The law requires a debt collector to send you a “validation notice” within five days of making contact with you. The notice must include the name of the creditor you owe money, how much money you owe and information about steps you can take if you don’t think the debt is yours.

First, never agree that the debt is yours. The FDCPA requires debt collectors to provide validation, such as a copy of a bill showing how much you owe on the debt, when you ask.

After you get the debt collector’s mailing address, send the company a letter within 30 days stating that you don’t owe the money and asking for verification of the debt. The debt collector also is required to stop contacting you if you ask in writing.

It’s likely that the debt collector has the incorrect amount for your debt or has tacked on high fees — Rheingold said you may owe $500, but a third-party debt collector may inflate that number to $2,500 with fees. Both of these practices are illegal. Third-party debt collectors cannot misrepresent the amount you owe or collect fees or interest above what’s stated in your original contract.

After sending a letter requesting that the debt collector verify the loan amount, file a complaint with the CFBP. If the debt collector sues you, seek legal assistance and respond to all court summons.

There’s a possibility that a third-party debt collector will sue you if you don’t agree to make payments on your debt, regardless of whether you actually owe the money. If you do receive a court summons, do not ignore it, Rheingold said. Be sure to show up on your appointed date, with an attorney if you can, to make sure that the court doesn’t rubber-stamp a judgment against you.

If a debt collector is contacting you about more than one debt and you do want to make payments, you can dictate where the payment goes. It’s illegal for a third-party debt collector to apply your payment to a debt that you have said you don’t owe.

You also may want to consider a serious assessment of your financial situation, Rheingold said. “You need to have a real understanding of what you can afford and what you can’t,” he said. “Maybe that’s the time to sit down with a financial counselor.”

You’ll also want to figure out which debts to prioritize. If you need your car for work, for example, you’ll want to pay your auto loan.

Any payments you can make need to be substantial, Rheingold said. “Paying a little money here and a little there isn’t going to do you any good,” he said. Making minimum payments while accumulating more debt will not lead to financial health, and, in extreme situations, consumers may want to look at bankruptcy options.

It depends. Debt collectors can have money taken from your paycheck and your bank account with a court order. But the debt collector first must sue you. That’s why it’s vital that you respond to any legal notices from debt collectors, preferable with legal counsel.

Federal benefits such as Social Security typically cannot be garnished for repayment of debts.

A statute of limitations, which begins when you miss your first debt payment, limits the window of time that debt collectors have to sue you and win payment. When that time frame passes, an unpaid debt is considered “time-barred.”

The length of the statute of limitations is determined by the type of debt and the laws in the state where your contract originated. Be careful: If you make a payment or acknowledge your debt in writing during the statute of limitations, the time will reset.

Conclusion

While debt collectors may be annoying or bordering on abusive, at times they are trying to collect a legitimate debt. In most cases, you can legally make debt collectors leave you alone, but your inability to pay outstanding debt remains.

“If you owe the debt, you can’t get blood from a rock,” Rheingold said. “But you can still say, ‘I don’t want you to call me anymore.’”

When you get the debt collectors off your back, take a hard look at your options. Making minimum payments typically isn’t enough to reduce debt, and it could prove difficult to rein in spending while you make debt payments.

Rheingold said nonprofit credit counselors will provide free guidance for people struggling to get out of debt, including information about bankruptcy. “Sometimes you’re better off getting a fresh start so that you can renew your credit (history),” he said. “If you find yourself in that position, think about how you got there and maybe seek help.”

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Using a Home Equity Loan to Consolidate Debt: What to Consider

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If you need money fast, a home equity loan might be a good option. A home equity loan can provide you with a lump sum of money in a matter of weeks; the borrowed amount can then be paid off on a monthly basis for a fixed rate. It can be especially helpful to use this type of loan to help consolidate your current debt. A home equity loan can combine debt from various lenders, such as different credit card companies, and place it into one convenient payment.

However, a home equity loan might not always be the best option for everyone. It’s important to understand how it works before making a final decision. This guide will help you learn what a home equity loan is, how it can be used, and how to qualify for one, so you can decide whether this loan product fits into your financial plan.

What is a home equity loan?

A home equity loan allows you to borrow money from a lender (usually a local bank) and uses your house as collateral for repayment. The interest rates can either be fixed or variable with a set repayment term of usually around 10 to 15 years.

“Home equity loans allow you to take out a lump sum up to a maximum percentage of the home’s value,” said Demond Johnson, a loan officer with Guild Mortgage based near Fort Worth, Texas. While the borrowed loan amount varies by each lender, it usually doesn’t reach over 80%.

You can use this loan for just about anything. However, it’s usually best when used toward an investment that will help you in the long run, like consolidating your current debt, and not used on something frivolous, like a luxurious vacation. Remember: You will need to pay this loan back — if you don’t, your house can go into foreclosure.

Pros and cons of a home equity loan

It’s important to understand the pros and cons of a home equity loan before considering applying for one. Consider the following.

Pros

  • It may be your cheapest option: Home equity loans typically have lower rates than a credit card or other loan product, said Johnson.
  • You may have a lower tax liability: The interest on home equity loans may be tax deductible.

Cons

  • You could lose your home: Home equity loans might not be a great option for those with poor spending habits. Since your home is on the line, these loans are best suited for disciplined borrowers who won’t miss payments.
  • You may accumulate more debt: Even though you’re consolidating your debt, you’re not debt free. Those who overspend and are not smart with their finances can continue to rack up more debt as time goes on, causing an even heavier financial burden than before.
  • You could misuse loan funds: A home equity loan can be used for just about anything, and that may be problematic for borrowers with poor spending habits. You may, for instance, want to pay for an upcoming vacation or wedding, but that will only result in more future debt without any return on your investment. Home repairs or renovations are a better use of funds, as they can increase your property value.

Using a home equity loan to consolidate debt

There are many solid reasons why someone might want to use a home equity loan to help consolidate debt.

Johnson said it makes sense to use this type of loan to help consolidate high interest debt such as with various credit cards because “the savings can be significant.” Using home equity loans to pay off other debts, such as student loans might also be wise, said George Burkley, owner of American Mortgage & Financial Services in Indiana — “[the] rates are usually much lower.”

Burkley also stated that if you’re looking to do home renovations or repairs on the house, or are interested in buying a second home, a home equity loan might be a good option to consolidate that debt, as opposed to using a credit card.

How to qualify for a home equity loan

When applying for a home equity loan, there are a few things a borrower will need to consider in order to qualify.

Collateral

Borrowers will need to have substantial collateral. For a home equity loan, your house is the collateral. If you can’t make the payments each month, the lender can take away your house.

Credit score

Lenders usually look at your credit score when you qualify for any type of loan, and a home equity loan is no different. A borrower’s credit score can play a significant role when qualifying for a home equity loan. Johnson said borrowers usually need a 680 (or higher) FICO score to qualify, but scores can vary depending on each lender.

Equity

A borrower’s equity can help determine how much funds can be borrowed with a home equity loan. According to Burkley, equity usually cannot exceed “over 85-95% of what the house is worth.”

Debt-to-income ratio

Lenders will look at your income and current debts, such as credit cards, current mortgage, and student loans, to determine whether you’re able to take out a home equity loan. Lenders want to ensure you can pay back your debt so if you already have a substantial amount, you may not be an ideal candidate. Burkley said borrowers should have around a 40% to 45% debt-to-income ratio to qualify for a home equity loan.

Where to find home equity loans

A home equity loan might be a good option for you. If you’re looking to find a loan, LendingTree (the parent company of MagnifyMoney) might be able to help. With its online marketplace, you’re able to use one form to potentially be matched with up to five offers at once. First choose the type of property you need the home equity loan for, such as a condo, single family home or a townhouse. Then finish completing the form by adding your personal information and you’ll instantly receive offers available to you.

LendingTree also has a convenient home equity calculator that can help determine the estimated amount you’re eligible to borrow. This can help you to decide whether a home equity loan might be useful for your financial needs or if another option might be more efficient.

What to consider as you shop home equity loans

When searching for home equity loans, there are a few important aspects to keep an eye on. Here are a few of the most common aspects to watch out for.

  • Interest rates: Rates vary from each lender. It’s important to compare interest rates with all lenders to ensure you get the best possible rate for your financial needs. Keep in mind, some lenders are more likely to provide lower interest rates to those with excellent credit.
  • Origination fees: Some home equity loans can come with fees, such as origination fee that is applied when processing the loan.
  • Prepayment penalties: Lenders can also charge a prepayment penalty for when you want to pay off your loan early. It’s important to check with each lender to see which fees are tacked on.
  • Lenders: Search for a lender you feel most comfortable working with. You want to be able to actively discuss your financial needs with a lender so you can learn how their offers will fit for your budget and your lifestyle.

Home equity loan vs. HELOC: What’s the difference?

A home equity loan and home equity line of credit (HELOC) have a few similarities. For example, they are both backed by the equity in your home. The borrowed amount is also based on your home equity, which is normally around 80% to 90%.

However, there is a distinct difference between these two financial products: While a home equity loan provides funds in one lump sum, a HELOC is a revolving account. With the latter, you’ll be able to take out money you need during a certain time frame.

Johnson said it’s a good idea to consider a HELOC as “a VISA with a very large limit.” You’ll be charged interest on the money you borrow, and you’ll be able to pay off the HELOC and charge more to the account in the future.

However, Johnson warned that rates can change on a HELOC. That is something to consider when determining whether a HELOC is right for you.

Alternative ways to consolidate debt

Using a home equity loan to consolidate your debt might be the best option for you. However, there might be something else out there that’s an even better fit. To determine which is the best for you, it’s always smart to learn about all offerings so you get exactly what you need.

Debt consolidation loan vs. home equity loan

A debt consolidation loan (which can also be a personal loan) might be a good option for those who have a lot of debt from various lenders. Instead of paying a high-interest rate to each lender every month, you can consolidate the monthly payments into one lump sum. Often times, these rates can be much lower than what you were paying before.

Lenders usually look at your credit score for both a debt consolidation loan and a home equity loan. However, sometimes lenders can be more lenient with debt consolidation loans in terms of your credit score; oftentimes, borrowers can have less than stellar credit and still be approved for a personal loan or debt consolidation loan. However, those with excellent credit will be more likely to obtain lower interest rates with debt consolidation loans than those who have fair to poor credit.

And unlike home equity loans, debt consolidation loans don’t use your home as collateral, so you won’t have to worry about losing your home to the lender even if you can’t make payments. Find the best debt consolidation loans with our table below!

LendingTree
APR

5.99%
To
35.99%

Credit Req.

Minimum 500 FICO

Minimum Credit Score

Terms

24 to 60

months

Origination Fee

Varies

SEE OFFERS Secured

on LendingTree’s secure website

LendingTree is our parent company

LendingTree is our parent company. LendingTree is unique in that you may be able to compare up to five personal loan offers within minutes. Everything is done online and you may be pre-qualified by lenders without impacting your credit score. LendingTree is not a lender.

Balance transfer card vs. HEL

A balance transfer card with a promotional 0% APR can be ideal for those with high-interest credit card debt. However, qualifying for a credit card with a low balance transfer rate and promotional APR can be difficult.

While a home equity loan can be used to consolidate a variety of different debt, including home repairs, a balance transfer is strictly used for credit card debt.

Some balance transfer cards don’t come with a transfer fee, especially for those borrowers with excellent credit. However, many cards charge a fee equal to a certain percentage of your balance.

Home equity loans can sometimes allow borrowers to combine a larger amount of debt than with a balance transfer. However, a home equity loan requires you to have equity in your home. As a result, some homeowners may find that they don’t qualify for this type of financing.

A home equity loan can be a great option when you need money fast for debt consolidation, such as combining credit card debt or other debt accumulated by home renovations and repairs. But these types of loans aren’t always the best fit for everyone and should be well-considered before making a decision.

Discover it® Balance Transfer

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Rates & Fees

Discover it® Balance Transfer

Intro BT APR
0% for 18 Months
Regular APR
13.99% - 24.99% Variable
Balance Transfer Fee
3%
Annual fee
$0
Credit required
good-credit
Excellent/Good Credit

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Carissa Chesanek
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Carissa Chesanek is a writer at MagnifyMoney. You can email Carissa here

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Balance Transfer, Best of, Pay Down My Debt

Best 0% APR Credit Card Offers – October 2018

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication. This site may be compensated through a credit card partnership.

There are a lot of 0% APR credit card deals in your mailbox and online, but most of them slap you with a 3 to 4% fee just to make a transfer, and that can seriously eat into your savings.

At MagnifyMoney we like to find deals no one else is showing, and we’ve searched hundreds of balance transfer credit card offers to find the banks and credit unions that ANYONE CAN JOIN which offer great 0% interest credit card deals AND no balance transfer fees. We’ve hand-picked them here.

If one 0% APR credit card doesn’t give you a big enough credit line you can try another bank or credit union for the rest of your debt. With several no fee options it’s not hard to avoid transfer fees even if you have a large balance to deal with.

1. The Amex EveryDay® Credit Card from American Express – Introductory 0% for 15 Months on balance transfers and purchases, $0 balance transfer fee.

This offer edges out competitors with the longest 0% intro period and standout perks. The Amex EveryDay® Credit Card from American Express has increased value with an intro 0% for 15 Months on purchases and balance transfers, then 14.74%-25.74% Variable APR and a $0 balance transfer fee. (For transfers requested within 60 days of account opening.) In addition to the great balance transfer offer, you can earn rewards — 2x points at US supermarkets, on up to $6,000 per year in purchases (then 1x), 1x points on other purchases.

The information related to The Amex EveryDay® Credit Card from American Express has been collected by MagnifyMoney and has not been reviewed or provided by the issuer of this card prior to publication.

2. BankAmericard® credit card – 0% Introductory APR for 15 billing cycles, $0 Introductory Balance Transfer Fee

BankAmericard® Credit Card

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on Bank Of America’s secure website

Cardholders can benefit from an 0% Introductory APR on purchases for 18 billing cycles and an introductory $0 balance transfer fee for the first 60 days your account is open. After that, the fee for future balance transfers is 3% (min. $10). Once the intro period ends, there is a 14.99% - 24.99% Variable APR. You can benefit from a $0 annual fee and access to your free FICO® Score.

When to consider a fee

While no-fee balance transfer cards are great, sometimes it may be worthwhile to consider a balance transfer card with a balance transfer fee. The fee will be a percentage — typically 3% or 5% — of the total amount you transfer, but cards that charge balance transfer fees often have longer intro periods. If you can’t afford the high monthly payments required to pay off your balance before the end of a 15-month intro period, a card offering a longer intro period — such as 18 months — can provide lower monthly payments while still allowing you to pay off your balance before the end of the intro period. Below, we provide an example that should help you decide when you should consider a fee.

For this example, we’re assuming $6,354 in credit card debt, which is the average balance Americans have, according to Experian’s 2017 State of Credit report.

By choosing the card offering an intro 0% for 18 months and a 3% transfer fee, you’ll only have to pay $364 a month to pay your debt and the balance transfer fee off in full during the intro period. That’s $60 less than the $424 monthly payment required by the card with an intro 0% for 15 months. Just beware that while you’re saving month to month, overall, you will end up paying about $190 more due to the balance transfer fee.

Discover it® Balance Transfer

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on Discover Bank’s secure website

Rates & Fees

If you need a longer intro period and lower monthly payment, we recommend the Discover it® Balance Transfer which offers an intro 0% for 18 months on balance transfers (after, 13.99% - 24.99% Variable APR) and has a 3% balance transfer fee.

3. Chase Slate® – 0% Intro APR on Balance Transfers for 15 months and 0% Intro APR on Purchases for 15 months, $0 Introductory Balance Transfer Fee

This deal is easy to find – Chase is one of the biggest banks and makes this credit card deal well known. Save with a 0% Intro APR on Balance Transfers for 15 months and Intro $0 on transfers made within 60 days of account opening. After that: Either $5 or 5%, whichever is greater. You also get a 0% Intro APR on Purchases for 15 months on purchases and balance transfers, and $0 annual fee. After the intro period, the APR is currently 16.74% - 25.49% Variable. Plus, see monthly updates to your free FICO® Score and the reasons behind your score for free.’

The information related to the Chase Slate® has been collected by MagnifyMoney and has not been reviewed or provided by the issuer of this card prior to publication.

4. Edward Jones World MasterCard® – Intro 0% for 12 billing cycles on balance transfers through 10/31/2018, NO FEE

Edward Jones World MasterCard®

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on Edward Jones’s secure website

You’ll need to go to an Edward Jones branch to open up an account first if you want this deal. Edward Jones is an investment advisory company, so they’ll want to have a conversation about your retirement needs. But you don’t need to have money in stocks to be a customer of Edward Jones and try to get this card. Just beware that you only have 60 days to complete your transfer to lock in the intro 0% for 12 billing cycles, and after the intro period a 14.99% Variable APR applies. This deal expires 10/31/2018.

5. Choice Rewards World MasterCard® from First Tech FCU – Intro 0% for 12 months on balance transfers, NO FEE

Choice Rewards World MasterCard® from First Tech FCU

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on First Technology Federal Credit Union’s secure website

Anyone can join First Tech Federal Credit Union by becoming a member of the Financial Fitness Association for $8, or the Computer History Museum for $15. You can apply for the card without joining first. The intro 0% for 12 months and no transfer fee on balances transferred within first 90 days of account opening is for the Choice Rewards World MasterCard® from First Tech FCU. After the intro period, an APR of 11.74%-18.00% variable applies. You also Earn 20,000 Rewards Points when you spend $3,000 in your first two months.

6. Rewards Visa Card from La Capitol FCU – Intro 0% for 12 months on balance transfers and purchases, NO FEE

Visa Rewards Card from La Capitol FCU

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on La Capitol Federal Credit Union’s secure website

Anyone can join La Capitol Federal Credit Union by becoming a member of the Louisiana Association for Personal Financial Achievement, which costs $20. Just indicate that’s how you want to be eligible when you apply for the card – no need to join before you apply. And La Capitol accepts members from all across the country, so you don’t have to live in Louisiana to take advantage of this deal on the Rewards Visa Card from La Capitol FCU. The introductory 0% for 12 months on balance transfers applies to balances transferred within first 90 days of account opening. After the intro period, a 12.25%-18.00% variable APR applies.

7. Visa® Signature Credit Card from Purdue FCU – Intro 0% for 12 months on balance transfers and purchases, NO FEE

Visa® Signature Credit Card from Purdue FCU

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on Purdue FCU’s secure website

The intro 0% for 12 months offer is only for their Visa® Signature Credit Card – other cards have a higher intro rate. After the intro period ends, 11.50%-17.50% Fixed APR applies. The Purdue Federal Credit Union doesn’t have open membership, but one way to be eligible for credit union membership is to join the Purdue University Alumni Association as a Friend of the University.

Anyone can join the association, but it costs $50. The good news is you can apply and get a decision before you become a member of the Alumni Association.

8. Premier America Credit Union – 0% Intro APR for 6 months on balance transfers and purchases, NO FEE

Premier Privileges Rewards Mastercard® from Premier America CU

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on Premier America’s secure website

Premier America is unique because it has the Student Mastercard® from Premier America CU that’s eligible for the intro 0% for 6 months on balance transfers, though credit limits on that card are $500 – $2,000. There is an 11.50% Variable APR after the intro period. There’s also a card for those with no credit history – the Premier First Rewards Privileges® from Premier America CU, with limits of $1,000 – $2,000 and a 19.00% Variable APR. If you’re looking for a bigger line, the Premier Privileges Rewards Mastercard® from Premier America CU is available with limits up to $50,000 and a 8.45% - 17.95% Variable APR.

Anyone can join Premier America by becoming a member of the Alliance for the Arts. You can select that option when you apply.

9. Visa Platinum Card from Money One FCU – as low as 0% intro APR for 6 months on balance transfers and purchases, NO FEE

Visa Platinum Card from Money One FCU

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on Money One Federal’s secure website

Anyone can join Money One Federal by making a $20 donation to Gifts of Easter Seals. And you can apply without being a member. You’ll see a drop down option during the application process that lets you select Gifts of Easter Seals as the way you plan to become a member of the credit union. Credit lines for the Visa Platinum Card from Money One FCU are as high as $25,000. After the as low as 0% intro apr for 6 months, there’s a 8.50% to 17.80% Variable APR.

Other 0% intro APR cards to consider

10. Andigo Credit Union – Intro 0% for 6 months on balance transfers and purchases, NO FEE

Visa Platinum Card from andigo

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on Andigo’s secure website

You’ll have a choice to apply for the Visa Platinum Cash Back Card from andigo, Visa Platinum Rewards Card from andigo, or Visa Platinum Card from andigo. The Visa Platinum Card from andigo has a lower ongoing APR at 11.99% - 20.99% Variable, compared to 11.99% - 20.99% Variable for the Visa Platinum Cash Back Card from andigo and 13.40% - 22.40% Variable for the Visa Platinum Rewards Card from andigo. So, if you’re not sure you’ll pay it all off in 6 months, the Visa Platinum Card from andigo is a better bet.

Anyone can join Andigo by making a donation to Connect Vets for $15, and you can submit an application for the card without being a member yet.

11. ETFCU's Platinum Rewards Credit Card – Intro 0% for 6 billing cycles on balance transfers, NO FEE

ETFCU's Platinum Rewards Credit Card

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on Evansville Teachers Federal Credit Union’s secure website

You don’t need to be a teacher to join this credit union. Just make a $5 donation to Mater Dei Friends & Alumni Association. The ETFCU's Platinum Rewards Credit Card has an ongoing APR of 10.00% to 17.70% Variable, so you can enjoy a decent rate even after the intro deal ends.

12. Elements Financial Platinum Visa® Credit Card – Intro 0% for 6 months on balance transfers and purchases, NO FEE

Elements Financial Platinum Visa® Credit Card

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on ELFCU’s secure website

To become a member and apply, you’ll just need to join TruDirection, a financial literacy organization. It costs just $5 and you can join as part of the application process. The ongoing APR is 10.74% Variable which is lower than typical cards.

13. Justice Federal Credit Union – Intro 0% for 6 months on purchases, balance transfers, and cash advances, NO FEE

Student VISA® Rewards Credit Card from Justice FCU

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on Justice Federal Credit Union’s secure website

If you’re not a Department of Justice, Homeland Security, or U.S. court employee (or a few others), you need to join a law enforcement organization to be a member of Justice Federal. One of the eligible associations for membership is the National Native American Law Enforcement Association. It costs $15 to join.

You can apply as a non-member online to get a decision before joining. And Justice is unique in that the Student VISA® Rewards Credit Card from Justice FCU is also eligible for the intro 0% for 6 months on purchases, balance transfers, and cash advances. So, if your credit history is limited and you’re trying to deal with a balance on your very first card, this could be an option. The APR after the intro period ends is 16.90% fixed.

14. Platinum Visa Card from Michigan State FCU – Intro 0% for 6 months on balance transfers, NO FEE

Platinum Visa Card from Michigan State FCU

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on Michigan State University Federal Credit Union’s secure website

There is the option to apply for the Cash Back Platinum Plus Visa Credit Card from Michigan State FCU or the Platinum Visa Card from Michigan State FCU. The Platinum Visa Card from Michigan State FCU has a lower ongoing APR at 8.90% APR - 16.90% variable, compared to the 12.90% APR - 17.90% variable APR for the Cash Back Platinum Plus Visa Credit Card from Michigan State FCU which can earn 1% cash back on all purchases. Anyone can join the Michigan State University Federal Credit Union by first becoming a member of the Michigan United Conservation Clubs. However, this comes at a high fee of $30 for one year.

Are these the best deals for you?

If you can pay off your debt within the 0% period, then yes, a no fee 0% balance transfer credit card is your absolute best bet. And if you can’t, you can hope that other 0% deals will be around to switch again.

But if you’re unsure, you might want to consider…

  • A deal that has a longer period before the rate goes up. In that case, a balance transfer fee could be worth it to lock in a 0% rate for longer.
  • Or, a card with a rate a little above 0% that could lock you into a low rate even longer.

The good news is we can figure it out for you.

Our handy, free balance transfer tool lets you input how much debt you have, and how much of a monthly payment you can afford. It will run the numbers to show you which offers will save you the most for the longest period of time.

promo balancetransfer wide

The savings from just one balance transfer can be substantial.

Let’s say you have $5,000 in credit card debt, you’re paying 18% in interest, and can afford to pay $200 a month on it. Here’s what you can save with a 0% deal:

  • 18%: It will take 32 months to pay off, with $1,312 in interest paid.
  • 0% for 12 months: You’ll pay it off in 28 months, with just $502 in interest, saving you $810 in cash. That even assumes your rate goes back up to 18% after 12 months!

But your rate doesn’t have to go up after 12 months. If you pay everything on time and maintain good credit, there’s a great chance you’ll be able to shop around and find another bank willing to offer you 0% interest again, letting you pay it off even faster.

Before you do any balance transfer though, make sure you follow these 6 golden rules of balance transfer success:

  • Never use the card for spending. You are only ready to do a balance transfer once you’ve gotten your budget in order and are no longer spending more than you earn. This card should never be used for new purchases, as it’s possible you’ll get charged a higher rate on those purchases.
  • Have a plan for the end of the promotional period. Make sure you set a reminder on your phone calendar about a month or so before your promotional period ends so you can shop around for a low rate from another bank.
  • Don’t try to transfer debt between two cards of the same bank. It won’t work. Balance transfer deals are meant to ‘steal’ your balance from a competing bank, not lower your rate from the same bank. So if you have a Chase Freedom® with a high rate, don’t apply for another Chase card like a Chase Slate® and expect you can transfer the balance. Apply for one from another bank.
  • Get that transfer done within 60 days. Otherwise your promotional deal may expire unused.
  • Never use a card at an ATM. You should never use the card for spending, and getting cash is incredibly expensive. Just don’t do it with this or any credit card.
  • Always pay on time. If you pay more than 30 days late your credit will be hurt, your rate may go up, and you may find it harder to find good deals in the future. Only do balance transfers if you’re ready to pay at least the minimum due on time, every time.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Nick Clements
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Nick Clements is a writer at MagnifyMoney. You can email Nick at nick@magnifymoney.com

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Pay Down My Debt

Chapter 13 Bankruptcy Guide

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

what is chapter 13 bankruptcy
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The two primary forms of bankruptcy that consumers choose to file are Chapter 7 and Chapter 13. Chapter 7 allows a filer to liquidate nonexempt assets to pay off creditors and discharge their remaining debts. Chapter 13, called a wage earner’s plan, gives filers with regular income the opportunity to create a short repayment plan to pay off their debts.

In 2005, when Congress approved the Bankruptcy Abuse Prevention and Consumer Protection Act, it became more difficult for consumers to qualify for Chapter 7 bankruptcy, pushing more people to use Chapter 13. Since then, of the 12.8 million consumer bankruptcy petitions filed, 4.1 million have been for Chapter 13 bankruptcy.

In this guide, we’ve compiled some of the highlights that consumers should understand about the process, as well as the results and effects of filing Chapter 13 bankruptcy. Reading through may help you prepare for what’s ahead and ensure you better identify whether Chapter 13 is the right choice for you.

How Chapter 13 works

Unlike Chapter 7 bankruptcy, which eliminates a consumer’s debts without a payment plan, Chapter 13 bankruptcy is centered around creating an installment repayment plan that a filer can maintain for several years, which is focused on eliminating secured debts.

The payment amount and duration are not based on what it would take to pay off the full amount of the debt, but are instead based on calculations determined by the income of the filer, their discretionary income, their assets and their debt. Instead of forcing the debtor to tackle the full amount of their current debt at its current interest rates, Chapter 13 gives a debtor the opportunity to pay off a percentage of the debt based on what they can afford to pay over a three- to five-year period.

The amount they can “afford” is based on income calculations and state median statistics as described on the official forms. The focus of the debt repayment is secured debt, which is debt that has underlying collateral. In some cases, however, significant payments may need to be made toward unsecured debts as well.

Chapter 13 is often a good choice for:

  • High-income earners
  • Those who fail the Chapter 7 means test by having too much discretionary income
  • Consumers with assets, such as a home or paid-off car, that they don’t want to lose in a bankruptcy
  • Consumers who are facing foreclosure, lawsuits brought on by debtors and collection notices

Many homeowners are relieved to find out that they may be able to save a home that’s in foreclosure by declaring Chapter 13. But at what point in the foreclosure process must you file before it’s too late? As it turns out, you can file for bankruptcy protection well into the foreclosure process and still save your home, according to Florida attorney Ryan Albaugh.

“A debtor can file a case in the morning and stop a sale for the same day, as long as the debtor complies with all needs,” Albaugh said. “They can file a shell Chapter 13 without all the schedules and get a notice to stop the sale.”

What debts are forgiven or discharged under Chapter 13?

Chapter 13 allows for a broader set of forgivable debts than Chapter 7, including:

  • Debts caused by willful and malicious damage to property
  • Debts due to divorce agreement property settlements
  • Debts for funds borrowed under false pretenses
  • Debts that were taken on to help pay for tax obligations (the tax obligations themselves are not dischargeable)

Other debts that are dischargeable under Chapter 13 include:

  • Medical bills
  • Consumer debt
  • Personal loans

Debts that are not dischargeable under Chapter 13 include:

  • Certain long-term debts, such as a mortgage
  • Alimony and child-support debts
  • Certain tax debts
  • Debts due to DUI
  • Guaranteed or government-funded student loans

Who is eligible?

Chapter 13 bankruptcy provides an accessible way for many individuals, including those who are self-employed, to regain control over their debt, even if they don’t qualify for Chapter 7. But not everyone can declare Chapter 13 bankruptcy since there are still qualifications for eligibility.

The first qualification is that you must be employed. “If a person is unemployed, they won’t qualify for the plan because they won’t have sufficient income,” Albaugh said. Additional requirements include:

  • Unsecured debt must be less than $394,725 (as of 2018)
  • Secured debt must be less than $1,184,200 (as of 2018)

It’s not just the filer’s current situation that determines their eligibility to file for Chapter 13. Some of their actions in the six months leading up to the filing can have a bearing as well. Within 180 days of filing bankruptcy, the filer cannot have:

    • Had another bankruptcy petition dismissed for willful failure to appear before the court
    • Had another bankruptcy dismissed for failure to comply with orders of the court

How to file Chapter 13 bankruptcy

First steps

Credit counseling briefing

Choose an approved provider in the state you’re filing in within the 6 months preceding your filing

Find your court

Depends on the district court in which your state wants you to file

Secure any local forms that are required for your filing

These are forms that are specific to your state and will generally be listed on the website for your local court

Form B2010

Notice Required by 11 U.S.C. § 342(b) for Individuals Filing for Bankruptcy

Forms for the initial petition

Form 101

Voluntary Petition for Individuals Filing for Bankruptcy

Form 121

Your Statement About Your Social Security Numbers

Form 119

Bankruptcy Petition Preparer’s Notice, Declaration and Signature

Form 2800

Disclosure of Compensation of Bankruptcy Petition Preparer

Form 103A (when relevant)

Application for Individuals to Pay the Filing Fee in Installments

Form 101A (when relevant)

Initial Statement About an Eviction Judgment Against You

Form 101B (when relevant)

Statement About Payment of an Eviction Judgment Against You

Certificate from completed credit counseling

A full list of all your creditors

Within 14 days of filing

Form 106Dec

Declaration About an Individual Debtor’s Schedules

Form 106Sum

A Summary of Your Assets and Liabilities and Certain Statistical Information

Forms 106A-J

Schedules to 106 listing property, debtors, income, leases, income, expenses and more

Form 107

Your Statement of Financial Affairs for Individuals Filing for Bankruptcy

Form 2030

Disclosure of Compensation of Attorney For Debtor

Form 122C-1

Chapter 13 Statement of Your Current Monthly Income and Calculation of Commitment Period

Form 122C-2 (when relevant)

Chapter 13 Calculation of Your Disposable Income (for payment of nonpriority, unsecured debt)

Form 113 (unless your local court differs)

Chapter 13 Plan

Copies of all pay stubs and remittances received during the 60 days preceding the filing

First steps

One of the first things consumers need to do before filing bankruptcy is to get a credit counseling briefing from a state-approved provider. It’s required that this is done within the six months before you file. When filing with your spouse, both spouses must have the briefing.

During the briefing, filers will learn alternative options for resolving their debt that can help them avoid filing Chapter 13 bankruptcy. The counseling ranges in price, with online classes offered by some providers for $14.95 per household and one-on-one phone sessions for $50 per person. Lastly, some providers charge an extra fee for the completion certificate sent to the bankruptcy court.

With credit counseling out of the way and a clear decision made to file Chapter 13, the next step is to review the district courts in your state to determine which court should receive your paperwork. After determining the right court, you’ll want to go to their website and download the local forms that the local court requires for your filing, most notably the Chapter 13 Plan, Form 113, which may require the federal form or a local form.

The last step you need to take before petitioning the court is to read Form B2010. This notice gives a brief review of each type of bankruptcy, lists costs associated with filing and lists the debts that cannot be discharged with each type. As of 2018, the cost for Chapter 13 filing and administrative fees totaled $310 (not including attorney fees).

Petitioning the court

After the pre-petition steps are done, it’s time to start completing forms to petition the court and officially file for bankruptcy. For Chapter 13 filers, the process begins with these forms:

  • Form 101: Voluntary Petition for Individuals Filing for Bankruptcy
  • Form 121: Your Statement About Your Social Security Numbers
  • Form 119: Bankruptcy Petition Preparer’s Notice, Declaration and Signature
  • Form 2800: Disclosure of Compensation of Bankruptcy Petition Preparer

You can also include several optional forms, when relevant:

  • Form 103A: Application for Individuals to Pay the Filing Fee in Installments
  • Form 101A: Initial Statement About an Eviction Judgment Against You (individuals)
  • Form 101B: Statement About Payment of an Eviction Judgment Against You (individuals)

Finally, you will be asked to submit a list of all your creditor’s names and addresses. Your local court may have its own requirements for formatting of this list, so check their website for instructions.

No more than 14 days after filing

After filing Form 101, you have 14 days to file the rest of the required forms, which are:

  • Form 106Dec: Declaration About an Individual Debtor’s Schedules
  • Form 106Sum: A Summary of Your Assets and Liabilities and Certain Statistical Information (individuals)
  • Forms 106A-J: Schedules to 106 listing property, debtors, income, leases, income, expenses and more
  • Form 107: Your Statement of Financial Affairs for Individuals Filing for Bankruptcy (individuals)
  • Form 2030: Disclosure of Compensation of Attorney For Debtor
  • Form 122C-1: Chapter 13 Statement of Your Current Monthly Income and Calculation of Commitment Period
  • Form 122C-2 (when required): Chapter 13 Calculation of Your Disposable Income
  • Form 113 (unless your local court differs): Chapter 13 Plan

You will also need to submit copies of all pay stubs and other payment remittances you have received during the 60 days that precede your bankruptcy filing. Check with your court to see if you need to submit these to the court or the trustee.

While it’s not a requirement to file, it should be noted that there is a second financial planning course that must be taken before a filer makes their last payment on the Chapter 13 plan. This course prepares the filer for financial success after the bankruptcy is final, which helps reduce the likelihood that they’ll need to rely on bankruptcy again in the future.

Pros and cons of declaring Chapter 13 bankruptcy

As with any major debt management process, Chapter 13 bankruptcy has both positive and negative aspects to analyze before you proceed. One of the biggest pros for many debtors is that they can usually keep their nonexempt assets when filing a Chapter 13 bankruptcy. Nonexempt assets are generally defined as owned assets that are not necessary to maintain a home or job. These would be property such as a vacation home, a recreational vehicle (RV) or a boat.

Another positive aspect of Chapter 13 is that it stops much of the debt collection, wage garnishment and foreclosure activity against the filer for those debts listed in the bankruptcy. This is especially meaningful for homeowners who want to keep their homes but have fallen behind in payments, including those who currently in foreclosure.

Chapter 13 also makes it easier to repay debt since it effectively consolidates all the listed debt into one payment that can be made to the trustee monthly. In the case of what’s called a “cramdown,” Chapter 13 may even allow a debtor to reduce the amount owed on their secured debt by reducing the balance to match the value of the underlying collateral and effectively reducing the interest.

One of the biggest disadvantages of filing for Chapter 13 is that the value of any nonexempt assets the filer wants to keep can be tallied and used to establish the amount of their responsibility for payment of nonpriority, unsecured debt, such as credit cards and personal loans. The goal here is to ensure that the value of assets that would have been liquidated under a Chapter 7 to pay these unsecured claims are still paid out.

In other words, if you owned a boat valued at $10,000 that would have been sold under a Chapter 7 bankruptcy, then under Chapter 13 you must pay that amount toward nonpriority, unsecured debt. You don’t have to sell the asset to pay that off, but it does increase your overall repayment burden.

For secured debts, the value of the underlying collateral must be paid to those lenders, which can also increase your overall debt burden under the plan. And because the debts take several years to be discharged, the debtor is expected to maintain payments during that time. If they cannot, then they may find their filing dismissed and collections and foreclosure procedures restarting.

“If [a filer] falls behind, then the trustee files a motion to dismiss, which [the filer] would either allow or explain to the judge what happened, and [their] plan for getting back current,” Albaugh said. Without a plan to get back on track, Albaugh said a homeowner could be facing some trouble. “If you were using [Chapter 13] to get caught up on a house, then the foreclosure process starts back up again and you lose that bankruptcy protection,” he said.

Pros

Cons

  • Through Chapter 13, you can save a home from foreclosure
  • Effectively consolidates debt to one payment and reduces the total amount paid
  • During the repayment term, creditors cannot start or continue collection actions
  • Chapter 13 can reduce interest applied to debt
  • In some instances, offers protection to cosigners

  • The value of your nonexempt assets may be added to your debt repayment
  • The bankruptcy case can be dismissed if the filer doesn’t pay for the full duration, if they fail to pay child support or if they fail to file taxes.
  • With Chapter 13, it takes several years for debts to get discharged
  • Lenders with claims secured by collateral must be paid back an amount equal to the collateral’s value
  • Some debts might need to be paid in full, including those purchased within a certain period before the bankruptcy filing

Chapter 13 bankruptcy: FAQs

It will erase any eligible debts that are listed in the bankruptcy and paid according to the plan.

On Form 122C-1, filers work through a calculation that determines their commitment period based on their income and state medians. In addition, they may be required to determine their disposable income through Form 122C-2. These two forms establish the payment and the commitment term. But if the filer has nonexempt assets or assets used to secure some of the debt they are listing in the bankruptcy, the value of those assets might be added to the overall payment expectation.

Generally speaking, Chapter 13 is designed for debtors who have assets that they want to keep while still declaring bankruptcy. But, as noted above, the value of certain nonexempt assets or those used to secure debts listed in the bankruptcy may be added to the overall payment. The debtor can decide whether to then liquidate those assets or find other ways to pay off their value.

As long as the filer continues making payments according to the bankruptcy plan, creditors cannot pursue collection activities.

Life after bankruptcy

One of the biggest considerations people make when deciding whether to file for bankruptcy is the potential impact it will have on their future financial lives. While it can certainly help them clear out massive amounts of debt that they couldn’t handle on their own, it can also restrict their ability to take out loans and credit during the payment term of the bankruptcy by requiring them to get the court’s permission first.

Also, after the payment plan is done, a completed Chapter 13 bankruptcy can show on your credit report for up to seven years. As Albaugh noted, however, a filer will usually have already negatively impacted their credit rating through charge-offs, delinquencies, and repossessions before moving on to bankruptcy. In that case, Chapter 13 can actually help the credit restoration process and limit the amount of damage their score will incur.

One positive note to keep in mind is that the more time that passes after your bankruptcy is completed, the less impact it will have on your FICO Score.

There are ways to rebuild your credit after completing Chapter 13 bankruptcy, including by taking out new loans and credit cards. In some cases, these loans might have higher interest rates and credit cards might be secured by an initial payment until the filer re-establishes themselves and improves their credit.

But the most important step to take when rebuilding your credit after bankruptcy is to incorporate the budgeting and financial planning lessons learned in the second bankruptcy course so that you know you are only taking on debt you can manage.

Alternatives to Chapter 13

Although the number of bankruptcy filings since 2005 seems high, not everyone decides to file bankruptcy to deal with their financial issues. There are other options for consumers who find themselves unable to pay off their debts and facing multiple collections actions, and those other options might be a better choice for some consumers. These options include:

As part of the bankruptcy completion, there are two courses you need to take. The first is the pre-filing credit counseling and the second is the pre-discharge debtor education, which is a financial management course before you make your final bankruptcy plan payment. In taking both courses now, before you file, you can learn about a variety of options for debt consolidation and ways to rework your budget and re-prioritize your spending. It’s possible that this re-education can give you the skills and resources you need to create a personal plan for organizing and tackling your debt without filing for bankruptcy.

Some lenders might be open to renegotiating terms with you to reduce interest rates, create payment plans that get you caught up, remove fees and maybe even forgive portions of balances. Just remember that if this happens, you may have tax consequences since forgiven and canceled debts may be taxable. Additionally, according to Albaugh, sometimes settling with creditors on your own requires a lump-sum payment, whereas bankruptcy allows for installment payments on a lowered amount.

If you have assets that are securing debt, you may want to consider voluntarily surrendering them to your creditors to remove debt. For unsecured debts, you may want to consider liquidating your assets, such as RVs, that you own in full and use the proceeds to pay off the debt.

For consumers who can pass the Chapter 7 means test and have no nonexempt assets to protect, Chapter 7 may be a more cost-effective choice. Through a no-asset Chapter 7 filing, your debts can be discharged without payment or liquidations. This gives you a clean slate much faster and, for those with a lower income, can save a lot of money.

Conclusion

Not only does a Chapter 13 filing require a long-term commitment and an understanding of the impact on your credit, but it also carries an expense, as the filer must pay the court, the trustee and their attorney. Before you consider attempting a Chapter 13 without an attorney, note that the U.S. Bankruptcy Court instruction packet states that it is “… extremely difficult to succeed in a Chapter 11, 12 or 13 case without an attorney.”

While attorney fees can run into the thousands of dollars, they generally have installment plans that make it easier for filers to get the expert help they need on a payment plan they can afford. Attorneys also generally offer a free consultation for the initial meeting, which allows you to get to know several attorneys and find the one that you think will get you the best results at a price you can afford.

To start looking for a bankruptcy attorney, you can check with the American Bar Association, as well as state Bar Associations. You can also look for reviews online to help narrow down your choices.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

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The Ultimate Guide to Debt Management Plans

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If you’re tired of struggling with debt and not making any real progress toward paying it down, you may want to consider debt management plans. These plans, which are typically administered by nonprofit third-party credit counseling agencies, can help you create a road map out of debt while lowering interest charges and fees.

To get the ball rolling on a debt management plan, explore and compare nonprofit credit counseling agencies that offer them. Once you settle on an agency you want to work with, you will sit down with a credit counselor (or chat online or on the phone) to go over your financial details and your debts, one by one.

One of the benefits of working with a nonprofit credit counseling agency is that, in addition to helping you create a debt repayment plan, these companies can advise you on issues that may have led you into debt in the first place. Your credit counselor may offer advice on how to cut your spending or create a monthly budget, for example.

At the end of the day, the main goal of debt management plans is helping consumers pay down their debts on their own. The credit counseling agencies that administer these plans help by offering financial advice and negotiating with creditors on their client’s behalf.

If you think you could benefit from professional guidance and advice, a debt management plan could be exactly what you need. Keep reading to learn more about how these plans work, where you can find them and how much they cost.

What is a debt management plan?

As mentioned, debt management plans are administered by third-party credit counseling agencies. Once you decide to work with a credit counseling agency on a debt management plan, you’ll need to go through several steps to get started:

  1. Think through all the debts you have and why they may have become a problem. Also keep in mind that debt management plans are typically for unsecured debts, so many secured debts like your mortgage will not qualify.
  2. You’ll meet with a credit counselor to go over all the details of your financial situation including your spending habits, regular bills, debts and income. Be prepared to be honest and forthcoming about your debts and your struggles.
  3. Once you share your story, your credit counselor will offer comprehensive advice on how you can improve your finances outside your debt management plan. This advice can include tips on budgeting, reducing your monthly expenditures and avoiding more debt.
  4. Next, your credit counselor will compile your data and ask you to commit to a debt management plan if they believe it’s the best option. If you choose to move forward, you will begin making a single monthly payment to the credit counseling agency who will disburse the funds on your behalf. Your credit counselor may also suggest alternatives to debt management plans if they believe a better option is available.
  5. If you move forward with a debt management plan, your credit counselor will negotiate with your creditors on your behalf with the goal of lowering your interest rate and reducing or waiving any fees associated with your accounts.
  6. You continue making monthly payments to the credit counseling agency that continues paying your debt obligations on your behalf. Since debt management plans can take 48 months or longer to complete, the process can be a lengthy one.
  7. Once you repay all your debts, your credit counseling agency can advise you on how to avoid debt and create a budget that works for your lifestyle and income.

While the steps above may seem lengthy and cumbersome, debt management plans exist because some consumers are simply unable to get out of debt on their own. Bruce McClary, vice president of communications for the National Foundation for Credit Counseling (NFCC), said that an array of circumstances can lead to situations where families need outside help. Job loss, chronic overspending, reduction in work hours, loss of income and unexpected major expenses are often the biggest culprits when consumers spiral into debt they cannot control.

While debt management plans may be an imperfect solution, these plans are often one of the best options for consumers since they ultimately lead them to a debt-free life, can help consumers learn better financial habits and won’t destroy consumer credit scores in the process.

With that in mind, it can make sense to sign up for a debt management plan if:

  • You’re struggling to keep up with credit card payments and your situation only seems to get worse each month.
  • You’re ready to commit to a debt repayment plan that could take 48 months or longer.
  • You earn enough income that you could feasibly pay down your debt with some outside help.

The pros and cons of debt management plans

There are some situations where debt is too far out of control for debt management plans to work. According to Kevin Gallegos, vice president of client enrollment for Freedom Debt Relief, consumers with more than $7,500 in unsecured debt that they are struggling to repay may want to consider an alternative, such as debt settlement.

However, the amount of debt that works best for debt management plans varies based on the consumer, their income and their unique circumstances. Bankruptcy is another extreme option for consumers to consider when they simply cannot pay off debts on their own.

This brings us to one of the main downsides of debt management plans — the fact that they won’t work for everyone. Here are some additional pros and cons of these plans you could consider before you sign up:

Pros

  • Credit counseling agencies may be able to negotiate down your interest rate and/or any fees charged to your accounts.
  • If you can reduce interest rates with a debt management plan, it’s possible you could get out of debt faster.
  • Debt management plans allow you to make a single monthly payment each month versus multiple payments. This can simplify your financial life and make it easier to budget.
  • Debt management plans offer more than a way out of debt; they also offer comprehensive financial advice and counseling that can help you stay out of debt in the future.
  • As McClary noted, past-due accounts you’re struggling to manage may become easier to pay off because of concessions (waived late fees, waived over the limit fees, etc.) creditors may make.
  • Your monthly payment could be lower with a debt management plan than the combined payments you were paying before.
  • If you’re truly struggling to get out of debt on your own, it helps to have a financial advocate by your side as your life changes, said McClary. Professional credit counselors can help you make adjustments and keep track over time.
  • While your credit score may take a hit before you get on a debt management plan, enrolling in a plan may not hurt your credit. In fact, your credit score will likely increase as you begin repaying your debts on a regular basis via your debt management plan.

Cons

  • Debt management plans are not free. These plans typically come with a monthly fee between $25 and $35. Some also charge a one-time enrollment fee.
  • Debt management plans only work for unsecured debts. For that reason, you cannot use a debt management plan to repay your mortgage or a car loan. However, McClary said your credit counselor can still advise you on how to repay these debts in addition to the debts in your debt management plan.
  • You need enough income to be able to make a monthly payment each month and commit to your program.
  • Rachel Kampersal said debt management plans require you to change your habits dramatically since you will have to stop using credit. “Per requirements from creditors, any card that is entered into a debt management plan will be closed, meaning you can no longer make charges to these cards. While difficult, it’s important to stop incurring new debt.”
  • Debt management requires a serious commitment. Most plans take 48 months or longer to complete.
  • Gallegos said that debt management plans require you to repay all the money you borrow, whereas some alternatives like debt settlement and bankruptcy may allow you to repay less than you actually owe.

How to find a debt management plan

Since debt management plans are individually tailored to each consumer, one plan can be wildly different than the next. McClary said your plan can vary depending on how much debt you owe, your current interest rates and payments and how your interest rates and fees are negotiated down. This is a huge benefit for consumers since debt management plans come with specific advice instead of blanket solutions that may or may not work.

“One of the benefits of talking to a nonprofit credit counselor is that the advice you get is going to be very specific to your situation,” said McClary. “If you enroll in a debt management plan, the counselor will work with you to make sure your plan is tailored to your unique set of circumstances.”

As we already mentioned, debt management plans often come with monthly administration fees in the $25 to $35 range. Some credit counseling agencies may charge more (or less) per month, and McClary said some also charge an upfront administration fee that can vary.

The good news is that, by choosing a nonprofit credit counseling agency, you can end up with an affordable option that will leave you better off. Despite the monthly fees these plans charge, debt management can help you save thousands of dollars through reduced interest rates and creditor concessions. Plus, you get valuable advice and financial guidance all along the way when you choose to work with a nonprofit credit counseling agency versus a for-profit agency who is “not directed to provide coaching or advice,” said McClary.

If you’re looking specifically for a nonprofit credit counseling agency to work with, explore NFCC member agencies, all of which are nonprofit. NFCC member agencies are required to meet eligibility criteria that ensure they are accredited by a third party, upfront about included fees and provide consumers with counseling and financial guidance that can help them improve their finances over time.

The NFCC also suggests tips that can help you find a credit counseling agency that will work on your behalf. Strive to find an agency that:

  • is a 501(c)(3) nonprofit agency (all NFCC member agencies must meet this criteria)
  • is accredited by a third-party agency and not self-accredited
  • offers debt counseling and comprehensive advice along with access to debt repayment resources
  • is upfront about their fees
  • hires only certified financial counselors
  • works with all creditors to negotiate down your interest rate and fees
  • will work with you regardless of how much debt you have
  • offers several debt relief solutions in addition to debt management plans
  • credits all your payments (outside of fees they charge) to your debts
  • is bonded and insured

As we mentioned already, all members of the NFCC are required to meet these strict guidelines and rigorously train the credit counselors they hire. For that reason, it’s smart to look closely at NFCC members when searching for a nonprofit credit counseling agency who can help.

Here are some of the agencies you can consider:

Agency

Availability

Fees
GreenPath Financial Wellness50 states by phone and internet; 50+ branches nationwideOne-time setup fee $0 to $50; $0 to $75 per month
American Consumer Credit Counseling50 states by phone and internet; in-person branches in 3 states (Massachusetts, California and Texas)$39 enrollment fee; $5 to $50 monthly fee
Clearpoint Credit Counseling50 states by phone or internet; 15 branches nationwide Monthly fee up to $50
Cambridge Credit CounselingAll 50 statesEnrollment fee up to $75; monthly fee up to $50
Advantage Credit Counseling Service50 states by phone or internet; 5 locations in PennsylvaniaOne-time $50 setup fee; $5 to $50 monthly fee
InCharge Debt SolutionsAll 50 statesOne-time $40 setup fee; $25 to $55 monthly fee

Finding and working with a credit counselor

Whether or not you choose to move forward with a debt management plan, you could benefit from working with a credit counselor. Nonprofit credit counseling agencies offer free consultations that can help you determine how much debt you have, potential solutions and whether a debt management plan is for you.

Many times, a credit counselor can offer insights into your financial situation that you may not see on your own. They may see obvious ways you can cut your spending that you may have overlooked, for example. Their extensive knowledge of debt relief options also makes them ideal mentors for consumers who need professional help when it comes to assessing their debts and figuring out a plan that will work.

Once you start working with a credit counselor, they will:

  • Help you review your credit report to confirm and take note of each of your debts and respective interest rates
  • Offer budgeting and spending advice that could help you improve your current financial state
  • Explain key financial topics
  • Create a tailored debt management plan that can help you pay down debt over several years
  • Help you find ways to build a new lifestyle that doesn’t rely on credit or debt
  • Offer support and encouragement

What types of debt are allowed?

Consumers can apply for a debt management plan regardless of their credit score. Once they set up an initial consultation with a credit counseling agency, they will go over the details of their debts and their income with their agency who will come up with an action plan on their behalf. If the consumer decides to move forward with a debt management plan, it can take a few hours or a few weeks to get started. “Once the recommendation for a debt management plan is made, it’s up to you to decide how quickly to enroll,” said McClary.

As we already noted, however, not all debts qualify for debt management plans since these plans are aimed at debts not secured by collateral.
Debts that are allowed in debt management plans typically include:

Debts not applicable to debt management plans usually include:

  • Mortgage debt
  • Auto loans
  • Home equity loans and home equity lines of credit (HELOCs)
  • Federal student loans

If you have unsecured debts that qualify for a debt management plan and secured debts that don’t qualify, a debt management plan can still work. When you sign up for a debt management plan with a nonprofit agency, the credit counselor assigned to your case will offer comprehensive financial advice that can help you pay down all your debts — not just debts governed by your debt management plan.

According to McClary, credit counselors are also trained to direct you toward government or other nonprofit resources that can help you manage and pay off secured debts like your mortgage or auto loan.

What to expect on a debt management plan

While starting a debt management plan may be a huge relief, consumers should be aware of how their lives may change — for better or for worse.

Those changes include:

  • You cannot sign up for new credit cards, nor can you use the ones you have. While it may sound unreasonable to bar you from using credit, the point of your debt management plan is helping you dig your way out. “The last thing you want to be doing is running up more high-interest debt on the side,” said McClary. “You’re not doing yourself any favors in that situation.”
  • Without credit as a crutch, you will need to learn how to live within your means. “Sticking with a debt management plan requires commitment and responsibility,” said Gallegos. You may need to learn how to use a budget each month, and you will likely have to cut some luxuries from your life.
  • You may be asked to start setting aside cash savings for emergencies during your debt management plan. You will have to get used to saving money and not spending it if times get tough.

While you’re on a debt management plan, you will likely check in with your credit counselor on a regular basis. Your counselor can help you stay on track while you find new ways to save and manage your budget each month.

Also, note how important it is for you to keep up with your monthly debt management payment. If you are late or skip a payment, you could end up putting your program at risk, said McClary.

Fortunately, most creditors will likely work with you if you miss a payment. They may provide you with some time to get back on track because they ultimately want to be paid back in the end.

And this is why working with a credit counselor can be so advantageous. “They can work on your behalf,” said McClary.

If you are working with a credit counselor and think you’ll miss a payment, they can take proactive steps to mitigate consequences and create a plan to get you back on track. They can even negotiate to have additional late payments or late fees reduced or waived if you miss a payment. The key to making this work is being completely open and honest about your situation and speaking with your credit counselor as soon as you realize your payment will be late.

What happens after your debt management plan ends

Let’s say you make it through a debt management plan to the end. What then?

The reality is, very little happens when you’re done. Once your debt management plan is paid off, you are debt-free. There is no probation period once your plan ends either, which means you are free to move forward without having to worry about making debt payments each month.

However, keep in mind that your credit counselor won’t automatically abandon you when your program is over. Nonprofit credit counseling agencies will continue to provide guidance and assistance if you need it, including advice on how to maintain the debt-free lifestyle you’ve worked so hard to achieve.

For some people, this is the hardest part. Once you’ve paid down a ton of debt, it can be far too easy to get comfortable and start borrowing money again. This is especially true since debt management plans do not ruin your credit, and your credit score may even surge once all your debt is paid off.

At this point, you will need to continue following the advice of the credit counseling agency you hired to help and remember the benefits of being debt-free. Life is a lot more difficult when you’re juggling credit card bills and other payments each month. If you want to avoid winding up back in debt, it’s crucial to remember how far you’ve come and how wonderful freedom feels.

Frequently asked questions

As you consider debt management plans and other debt relief alternatives, it can help to find out as many details about each program as you can. These frequently asked questions about debt management plan may help.

Since debt management plans are offered through many different credit counseling agencies, their fees can vary. However, most debt management plans charge a monthly fee of $25 to $35. Some credit counseling agencies also charge an upfront setup fee.
A credit counselor is a financial professional who is trained to help you manage your debts, budget your money and improve your finances over time. While credit counselors oversee debt management plans, they are also knowledgeable about alternative debt relief methods, such as debt settlement, debt consolidation and bankruptcy.
While your credit score may suffer if you’re falling behind on monthly payments before you get your debt management plan set up, starting your plan should provide some relief. Your credit score should increase as you begin making regular monthly payments and your debt balances drop. Experian does note that you may see some negative side effects when accounts are closed, usually due to changes with your credit utilization rate or credit mix.
Debt management plans can last 48 months or longer from start to finish. However, the exact timeline if your debt management plan will depend on how much debt you have, your interest rates and your income, among other factors.
You will continue paying interest to your creditors while you’re on a debt management plan. However, credit counselors work hard to negotiate lower interest rates and waive or reduce fees on your behalf.
You cannot use your existing credit cards while you’re on a debt management plan, nor can you open new accounts. McClary also said that if you do manage to open new credit card accounts during your debt management plan, existing creditors who find out may stop participating in your debt management plan and reset your account to its original terms and interest rate.
It’s possible you could qualify for a mortgage or car loan during a debt management plan. However, you will need to work with your credit counselor to determine eligibility and whether you should consider an alternative.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Holly Johnson
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Holly Johnson is a writer at MagnifyMoney. You can email Holly here

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College Students and Recent Grads, Pay Down My Debt

7 Best Options to Refinance Student Loans – Get Your Lowest Rate

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Updated: October 1, 2018

Are you tired of paying a high interest rate on your student loan debt? You may be looking for ways to refinance your student loans at a lower interest rate, but don’t know where to turn. We have created the most complete list of lenders currently willing to refinance student loan debt. We recommend you start here and check rates from the top 7 national lenders offering the best student loan refinance products. All of these lenders (except Discover) also allow you to check your rate without impacting your score (using a soft credit pull), and offer the best rates of 2018:

LenderTransparency ScoreMax TermFixed APRVariable APRMax Loan Amount 
SoFiA+

20


Years

3.90% - 7.80%


Fixed Rate*

2.48% - 6.99%


Variable Rate*

No Max


Undergrad/Grad
Max Loan
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EarnestA+

20


Years

3.89% - 6.97%


Fixed Rate

2.47% - 6.23%


Variable Rate

No Max


Undergrad/Grad
Max Loan
Learn more Secured
CommonBondA+

20


Years

3.20% - 7.25%


Fixed Rate

2.72% - 7.25%


Variable Rate

No Max


Undergrad/Grad
Max Loan
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LendKeyA+

20


Years

3.49% - 8.72%


Fixed Rate

2.47% - 8.05%


Variable Rate

$125k / $175k


Undergrad/Grad
Max Loan
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Laurel Road BankA+

20


Years

3.50% - 7.02%


Fixed Rate

2.95% - 6.37%


Variable Rate

No Max


Undergrad/Grad
Max Loan
Learn more Secured
Citizens BankA+

20


Years

3.75% - 8.69%


Fixed Rate

2.72% - 8.32%


Variable Rate

$90k / $350k


Undergraduate /
Graduate
Learn more Secured
Discover Student LoansA+

20


Years

5.24% - 8.24%


Fixed Rate

4.87% - 8.12%


Variable Rate

$150k


Undergraduate /
Graduate
Learn more Secured

You should always shop around for the best rate. Don’t worry about the impact on your credit score of applying to multiple lenders: so long as you complete all of your applications within 14 days, it will only count as one inquiry on your credit score.

We have also created:

But before you refinance, read on to see if you are ready to refinance your student loans.

Can I get approved?

Loan approval rules vary by lender. However, all of the lenders will want:

  • Proof that you can afford your payments. That means you have a job with income that is sufficient to cover your student loans and all of your other expenses.
  • Proof that you are a responsible borrower, with a demonstrated record of on-time payments. For some lenders, that means that they use the traditional FICO, requiring a good score. For other lenders, they may just have some basic rules, like no missed payments, or a certain number of on-time payments required to prove that you are responsible.
LenderMinimum credit scoreEligible degreesEligible loansAnnual income
requirements
Employment
requirement
 
SoFi

Good or Excellent
score needed

Undergraduate
& Graduate

Private, Federal,
& Parent PLUS

None

Yes


(or signed job offer)
Learn more Secured
Earnest

660

Undergraduate
& Graduate

Private, Federal,
& Parent PLUS

None

Yes


(or signed job offer)
Learn more Secured
CommonBond

660

Undergraduate
& Graduate

Private, Federal,
& Parent PLUS

None

Yes


(or signed job offer)
Learn more Secured
LendKey

680

Undergraduate
& Graduate

Private & Federal

$24K

Yes

Learn more Secured
Laurel Road Bank

Not published

Undergraduate
& Graduate

Private, Federal,
& Parent PLUS

None

Yes


(or signed job offer)
Learn more Secured
Citizens Bank

680

Undergraduate
& Graduate

Private, Federal,
& Parent PLUS

$24K

Yes

Learn more Secured
Discover Student Loans

Not published

Undergraduate
& Graduate

Private & Federal

None

Yes

Learn more Secured

Diving Deeper: The best places to consider a refinance

If you go to other sites they may claim to compare several student loan offers in one step. Just beware that they might only show you deals that pay them a referral fee, so you could miss out on lenders ready to give you better terms. Below is what we believe is the most comprehensive list of current student loan refinancing lenders.

You should take the time to shop around. FICO says there is little to no impact on your credit score for rate shopping as many providers as you’d like in a single shopping period (which can be between 14-30 days, depending upon the version of FICO). So set aside a day and apply to as many as you feel comfortable with to get a sense of who is ready to give you the best terms.

Here are more details on the 7 lenders offering the lowest interest rates:

1. SoFi

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on SoFi’s secure website

Read Full Review

SoFi : Variable rates from 2.48% and Fixed Rates from 3.90% (with AutoPay)*

SoFiwas one of the first lenders to start offering student loan refinancing products. More MagnifyMoney readers have chosen SoFi than any other lender. The only requirement is that you graduated from a Title IV school. In order to qualify, you need to have a degree, a good job and good income.

Pros Pros

  • Borrowers can refinance private, federal and Parent PLUS loans together: Through SoFi, borrowers have the ability to combine all of their student loans (private, federal and Parent PLUS) when refinancing. Along with the ability to refinance Parent PLUS loans, parents can also transfer the PLUS loans into their child’s name.
  • Access to career coaches: SoFi offers their borrowers access to their Career Advisory Group who work one-on-one with borrowers to help plan their career paths and futures.
  • Unemployment protection: SoFi offers some help if you lose your job. During the period of unemployment they will pause your payments (for up to 12 months) and work with you to find a new job. However, just remember that any unemployment protection offered by SoFi would be weaker than the income-driven repayment options of federal loans.

Cons Cons

  • No cosigner release: While they offer you the opportunity to refinance with a cosigner, it is important to know that SoFi does not offer borrowers the opportunity to release a cosigner later on down the road.
  • You lose certain protections if you refinance a federal loan: This con is not unique to SoFi (and you will find it with all other private lenders). Federal loans come with certain protections, including robust income-driven payment protection options. You will forfeit those protections if you refinance a federal loan to a private loan.

Bottom line

Bottom line

SoFi is really the original student loan refinance company, and is now certainly the largest. SoFi has consistently offered low interest rates and has received good reviews for service. In addition, SoFi invests heavily in building a “community” – which means you can start to get other benefits once you are a SoFi member.

SoFi has taken a radical new approach when it comes to the online finance industry, not only with student loans but in the personal loan, wealth management and mortgage markets as well. With their career development programs and networking events, SoFi shows that they have a lot to offer, not only in the lending space but in other aspects of their customers lives as well.

2. Earnest

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on Earnest’s secure website

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Earnest : Variable Rates from 2.47% and Fixed Rates from 3.89% (with AutoPay)

Earnest focuses on lending to borrowers who show promise of being financially responsible borrowers. Because of this, they offer merit-based loans versus credit-based ones. 

Pros Pros

  • Flexible repayment options: Earnest offers some of the most flexible options when it comes to repayment. They allow you to choose any term length between 5-20 years. You can choose your own monthly payment, based upon what you can afford (to the penny). Earnest also offers bi-weekly payments and “skip a payment” if you run into difficulty.
  • Ability to switch between variable and fixed rates: With Earnest, you can switch between fixed and variable rates throughout the life of your loan. You can do that one time every six months until the loan is paid off. That means you can take advantage of the low variable interest rates now, and then lock in a higher fixed rate later.
  • Loans serviced in-house: Earnest is one of just a few lenders that provides in-house loan servicing versus using a third-party servicer.

Cons Cons

  • Cannot apply with a cosigner: Unlike many of the other lenders, Earnest does not allow borrowers to apply for student loan refinancing with a cosigner.
  • No option to transfer Parent PLUS loans to Child: If you are a parent that is looking to refinance your Parent PLUS loan into your child’s name, it is important to note that this cannot be done through refinancing with Earnest.
  • You lose certain protections if you refinance a federal loan: When refinancing with any private lender, you will give up certain protections if you refinance a federal loan to a private loan.

Bottom line

Bottom line

Earnest, who was recently acquired by Navient, is making a name for themselves within the student refinancing space. With their flexible repayment options and low rates, they are definitely an option worth exploring.

3. CommonBond

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CommonBond : Variable Rates from 2.72% and Fixed Rates from 3.20% (with AutoPay)

CommonBond started out lending exclusively to graduate students. They initially targeted doctors with more than $100,000 of debt. Over time, CommonBond has expanded and now offers student loan refinancing options to graduates of almost any university (graduate and undergraduate).

Pros Pros

  • Hybrid loan option: CommonBond offers a unique “Hybrid” rate option in which rates are fixed for five years and then become variable for five years. This option can be a good choice for borrowers who intend to make extra payments and plan on paying off their student loans within the first five years. If you can a better interest rate on the Hybrid loan than the Fixed-rate option, you may end up paying less over the life of the loan.
  • Social promise: CommonBond will fund the education of someone in need in an emerging market for every loan that closes. So not only will you save money, but someone in need will get access to an education.
  • “CommonBridge” unemployment protection program: CommonBond is here to help if you lose your job. Similar to SoFi, they will pause your payments and assist you in finding a new job.

Cons Cons

  • Does not offer refinancing in the following states: Idaho, Louisiana, Mississippi, Nevada, South Dakota and Vermont.
  • You lose certain protections if you refinance a federal loan: When refinancing with any private lender, you will give up certain protections if you refinance a federal loan to a private loan.

Bottom line

Bottom line

CommonBond not only offers low rates but is also making a social impact along the way. Consider checking out everything that CommonBond has to offer in term of student loan refinancing.

4. LendKey

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LendKey : Variable Rates from 2.47% and Fixed Rates from 3.49% (with AutoPay)

LendKey works with community banks and credit unions across the country. Although you apply with LendKey, your loan will be with a community bank. Over the past year, LendKey has become increasingly competitive on pricing, and frequently has a better rate than some of the more famous marketplace lenders.

Pros Pros

  • Opportunity to work with local banks and credit unions: LendKey is a platform of community banks and credit unions, which are known for providing a more personalized customer experience and competitive interest rates.
  • Offers interest-only payment repayment: Many of the lenders on LendKey offer the option to make interest-only payments for the first four years of repayment.

Cons Cons

  • Rates can vary depending on where you live: The rate that is advertised on LendKey is the lowest possible rate among all of its lenders, and some of these lenders are only available to residents of specific areas. So even if you have an excellent credit report, there is still a possibility that you will not receive the lowest rate, depending on geographic location.
  • No Parent PLUS refinancing available: Unlike several of the other student loan refinancing companies, borrowers do not have the ability to refinance Parent PLUS loans with LendKey.
  • You lose certain protections if you refinance a federal loan: As when refinancing federal loans with any private lender, you will give up your federal protections if you refinance your federal loan to a private one.

Bottom line

Bottom line

LendKey is a good option to keep in mind if you are looking for an alternative to big bank lending. If you prefer working with a credit union or community bank, LendKey may be the route to uncovering your best offer.

5. Laurel Road Bank

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Laurel Road Bank : Variable Rates from 2.95% and Fixed Rates from 3.50% (with AutoPay)

Laurel Road Bank offers a highly competitive product when it comes to student loan refinancing.

Pros Pros

  • Forgiveness in the case of death or disability: They may forgive the total student loan amount owed if the borrower dies before paying off their debt. In the case that the borrower suffers a permanent disability that results in a significant reduction to their income,Laurel Road Bank may forgive some, if not all of the amount owed.
  • Offers good perks for Residents and Fellows: Laurel Road Bank allows medical and dental students to pay only $100 per month throughout their residency or fellowship and up to six months after training. It is important for borrowers to keep in mind that the interest that accrues during this time will be added on to the total loan balance.

Cons Cons

  • Higher late fees: While many lenders charge late fees,Laurel Road Bank’s late fee can be slightly steeper than most at 5% or $28 (whichever is less) for a payment that is over 15 days late.
  • You lose certain protections if you refinance a federal loan: While not specific to Laurel Road Bank, it is important to keep in mind that you will give up certain protections when refinancing a federal loan with any private lender.

Bottom line

Bottom line

As a lender,Laurel Road Bank prides itself on offering personalized service while leveraging technology to make the student loan refinancing process a quick and simple one. Consider checking out their low-rate student loan refinancing product, which is offered in all 50 states.

6. Citizens Bank

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Citizens Bank (RI) : Variable Rates from 2.72% and Fixed Rates from 3.75% (with AutoPay)

Citizens Bank offers student loan refinancing for both private and federal loans through its Education Refinance Loan.

Pros Pros

No degree is required to refinance: If you are a borrower who did not graduate, with Citizens Bank, you are still eligible to refinance the loans that you accumulated over the period you did attend. In order to do so, borrowers much no longer be enrolled in school.

Loyalty discount: Citizens Bank offers a 0.25% discount if you already have an account with Citizens.

Cons Cons

Cannot transfer Parent PLUS loans to Child: If you are looking to refinance your Parent PLUS loan into your child’s name, this cannot be done through Citizens Bank.

You lose certain protections if you refinance a federal loan: Any time that you refinance a federal loan to a private loan, you will give up the protections, forgiveness programs and repayment plans that come with the federal loan.

Bottom line

Bottom line

The Education Refinance Loan offered by Citizens Bank is a good one to consider, especially if you are looking to stick with a traditional banking option. Consider looking into the competitive rates that Citizens Bank has to offer.

7. Discover

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Discover Student Loans : Variable Rates from 4.87% and Fixed Rates from 5.24% (with AutoPay)

Discover, with an array of competitive financial products, offers student loan refinancing for both private and federal loans through their private consolidation loan product.

Pros Pros

  • In-house loan servicing: When refinancing with Discover, they service their loans in-house versus using a third-party servicer.
  • Offer a variety of deferment options: Discover offers four different deferment options for borrowers. If you decide to go back to school, you may be eligible for in-school deferment as long as you are enrolled for at least half-time. In addition to in-school deferment, Discover offers deferment to borrowers on active military duty (up to 3 years), in eligible public service careers (up to 3 years) and those in a health professions residency program (up to 5 years).

Cons Cons

  • Performs a hard credit pull: While most lenders do a soft credit check, Discover does perform a hard pull on your credit.
  • No Parent PLUS refinancing available: Discover does not offer borrowers the option of refinancing their Parent PLUS loans.
  • You lose certain protections if you refinance a federal loan: Be careful when deciding to refinance your federal student loans because when doing so, you will lose access federal protections, forgiveness programs and repayment plans.

Bottom line

Bottom line

If you’re looking for a well-established bank to refinance your student loans, Discover may be the way to go. Just keep in mind that if you apply for a student loan refinance with Discover, they will do a hard pull on your credit.

 

Additional Student Loan Refinance Companies

In addition to the Top 7, there are many more lenders offering to refinance student loans. Below is a listing of all providers we have found so far. This list includes credit unions that may have limited membership. We will continue to update this list as we find more lenders:

Traditional Banks

  • First Republic Eagle Gold. The interest rates are great, but this option is not for everyone. Fixed rates range from 1.95% – 4.45% APR. You need to visit a branch and open a checking account (which has a $3,500 minimum balance to avoid fees). Branches are located in San Francisco, Palo Alto, Los Angeles, Santa Barbara, Newport Beach, San Diego, Portland (Oregon), Boston, Palm Beach (Florida), Greenwich or New York City. Loans must be $60,000 – $300,000. First Republic wants to recruit their future high net worth clients with this product.
  • Wells Fargo: As a traditional lender, Wells Fargo will look at credit score and debt burden. They offer both fixed and variable loans, with variable rates starting at 4.74% and fixed rates starting at 5.24%. You would likely get much lower interest rates from some of the new Silicon Valley lenders or the credit unions.

Credit Unions

  • Alliant Credit Union: Anyone can join this credit union. Interest rates start as low as 3.75% APR. You can borrow up to $100,000 for up to 25 years.
  • Eastman Credit Union: Credit union membership is restricted (see eligibility here). Fixed rates start at 6.50% and go up to 8% APR.
  • Navy Federal Credit Union: This credit union offers limited membership. For men and women who serve (or have served), the credit union can offer excellent rates and specialized underwriting. Variable interest rates start at 4.07% and fixed rates start at 4.70%.
  • Thrivent: Partnered with Thrivent Federal Credit Union, Thrivent Student Loan Resources offers variable rates starting at 4.13% APR and fixed rates starting at 3.99% APR. It is important to note that in order to qualify for refinancing through Thrivent, you must be a member of the Thrivent Federal Credit Union. If not already a member, borrowers can apply for membership during the student refinance application process.
  • UW Credit Union: This credit union has limited membership (you can find out who can join here, but you had better be in Wisconsin). You can borrow from $5,000 to $150,000 and rates start as low as 3.87% (variable) and 3.99% APR (fixed).

Online Lending Institutions

  • Education Loan Finance:This is a student loan refinancing option that is offered through SouthEast Bank. They have competitive rates with variable rates ranging from 2.55% – 6.01% APR and fixed rates ranging from 3.09% – 6.69% APR. Education Loan Finance also offers a “Fast Track Bonus”, so if you accept your offer within 30 days of your application date, you can earn $100 bonus cash.
  • EdVest: This company is the non-profit student loan program of the state of New Hampshire which has become available more broadly. Rates are very competitive, ranging from 4.29% – 7.89% (fixed) and 4.20% – 7.80% APR (variable).
  • IHelp : This service will find a community bank. Unfortunately, these community banks don’t have the best interest rates. Fixed rates range from 4.00% to 8.00% APR (for loans up to 15 years). If you want to get a loan from a community bank or credit union, we recommend trying LendKey instead.
  • Purefy: Purefy lenders offer variable rates ranging from 2.79%-8.32% APR and fixed interest rates ranging from 3.25% – 9.66% APR. You can borrow up to $150,000 for up to 15 years. Just answer a few questions on their site, and you can get an indication of the rate.
  • RISLA: Just like New Hampshire, the state of Rhode Island wants to help you save. You can get fixed rates starting as low as 3.49%. And you do not need to have lived or studied in Rhode Island to benefit.

Is it worth it to refinance student loans?

If you are in financial difficulty and can’t afford your monthly payments, a refinance is not the solution. Instead, you should look at options to avoid a default on student loan debt.

This is particularly important if you have Federal loans.

Don’t refinance Federal loans unless you are very comfortable with your ability to repay. Think hard about the chances you won’t be able to make payments for a few months. Once you refinance student loans, you may lose flexible Federal payment options that can help you if you genuinely can’t afford the payments you have today. Check the Federal loan repayment estimator to make sure you see all the Federal options you have right now.

If you can afford your monthly payment, but you have been a sloppy payer, then you will likely need to demonstrate responsibility before applying for a refinance.

But, if you can afford your current monthly payment and have been responsible with those payments, then a refinance could be possible and help you pay the debt off sooner.

Like any form of debt, your goal with a student loan should be to pay as low an interest rate as possible. Other than a mortgage, you will likely never have a debt as large as your student loan.

If you are able to reduce the interest rate by refinancing, then you should consider the transaction. However, make sure you include the following in any decision:

Is there an origination fee?

Many lenders have no fee, which is great news. If there is an origination fee, you need to make sure that it is worth paying. If you plan on paying off your loan very quickly, then you may not want to pay a fee. But, if you are going to be paying your loan for a long time, a fee may be worth paying.

Is the interest rate fixed or variable?

Variable interest rates will almost always be lower than fixed interest rates. But there is a reason: you end up taking all of the interest rate risk. We are currently at all-time low interest rates. So, we know that interest rates will go up, we just don’t know when.

This is a judgment call. Just remember, when rates go up, so do your payments. And, in a higher rate environment, you will not be able to refinance your student loans to a better option (because all rates will be going up).

We typically recommend fixing the rate as much as possible, unless you know that you can pay off your debt during a short time period. If you think it will take you 20 years to pay off your loan, you don’t want to bet on the next 20 years of interest rates. But, if you think you will pay it off in five years, you may want to take the bet. Some providers with variable rates will cap them, which can help temper some of the risk.

You can also compare all of these loan options in one chart with our comparison tool. It lists the rates, loan amounts, and kinds of loans each lender is willing to refinance. You can also email us with any questions at info@magnifymoney.com.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Nick Clements
Nick Clements |

Nick Clements is a writer at MagnifyMoney. You can email Nick at nick@magnifymoney.com

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Balance Transfer, Best of, Pay Down My Debt

Best balance transfer credit cards: 0% APR, 21 months

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication. This site may be compensated through a credit card partnership.

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Looking for a balance transfer credit card to help pay down your debt more quickly? We’re constantly checking for new offers and have selected the best deals from our database of over 3,000 credit cards. This guide will show you the longest offers with the lowest rates, and help you manage the transfer responsibly. It will also help you understand whether you should be considering a transfer at all.

1. Best balance transfer deals

No intro fee, 0% intro APR balance transfers

Very few things in life are free. But, if you pay off your debt using a no fee, 0% APR balance transfer, you can crush your credit card debt without paying a dime to the bank. You can find a full list of no fee balance transfers here.
The Amex EveryDay® Credit Card from American Express includes an extended intro period now at an intro 0% for 15 Months on balance transfers and purchases (14.74%-25.74% Variable APR after the promo period ends) and a $0 balance transfer fee. (For transfers requested within 60 days of account opening.) This offer is in direct competition with other $0 intro balance transfer fee cards like Chase Slate®.
In addition to the intro periods, you can benefit from a rewards program tailored to U.S. supermarket spenders where you earn 2x points at US supermarkets, on up to $6,000 per year in purchases (then 1x), 1x points on other purchases.
The intro offers, coupled with the rewards program make The Amex EveryDay® Credit Card from American Express the frontrunner among balance transfer cards, outpacing competitors. This card presents cardholders with the unique opportunity to transfer a balance and make a large purchase during the intro period, all while earning rewards on new purchases. To qualify for this card, you need Excellent/Good credit.
The information related to The Amex EveryDay® Credit Card from American Express has been collected by MagnifyMoney and has not been reviewed or provided by the issuer of this card prior to publication.
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  • Simple Welcome Offer
  • The 2-point bonus on grocery store spending is capped
  • You need 20 transactions each month to get the 20% bonus

 

Read our full review of The Amex EveryDay® Credit Card from American Express here.

 

Chase Slate®

Chase Slate®

The information related to the Chase Slate® has been collected by MagnifyMoney and has not been reviewed or provided by the issuer of this card prior to publication.

With Chase Slate® you can save with a 0% Intro APR on Balance Transfers for 15 months and a balance transfer fee that’s Intro $0 on transfers made within 60 days of account opening. After that: Either $5 or 5%, whichever is greater.  There’s also a 0% Intro APR on Purchases for 15 months. After the intro periods end, a 16.74% - 25.49% Variable APR applies. This card also has a $0 annual fee. Plus, you can see monthly updates to your FICO® Score and the reasons behind your score for free.

You can get longer transfer periods by paying a fee (either $5 or 5% of the amount of each transfer, whichever is greater), so this deal is generally best if you have a balance you know you‘ll pay in full by the end of the promotional period.

Also, keep in mind you can’t transfer a balance from one Chase card to another, so this is good if the balance you want to move is from a bank or credit union that’s not Chase.

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Transparency Score
  • Interest is not deferred during the balance transfer period, which means if you do not pay off your balance by the end of the promo period, you will not be charged the interest that would have accrued during the deferral period.
  • There are late payment and cash advance fees

Tip: You have only 60 days from account opening to complete your balance transfer and get the introductory rate.

BankAmericard® Credit Card

BankAmericard® credit card

There is a 0% Introductory APR on purchases for 18 billing cycles and an introductory $0 balance transfer fee for the first 60 days your account is open. After that, the fee for future balance transfers is 3% (min. $10). There’s also an 0% Introductory APR on purchases for 18 billing cycles. After that, a 14.99% - 24.99% Variable APR will apply.
 You need Excellent/Good credit to get this card and you can only transfer debt that is not already at Bank of America. You can get longer transfer periods by paying a fee, so this deal is generally best if you have a balance you know you’ll pay in full by the end of the 15-month promotional period.
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  • Interest is not deferred during the balance transfer period, which means if you do not pay off your balance by the end of the promo period, you will not be charged the interest that would have accrued during the deferral period.
  • No penalty APR – paying late won’t automatically raise your rate (APR)
  • There are late payment and cash advance fees

Tip: You can provide the account number for the account you want to transfer from while you apply, and if approved, the bank will handle the transfer.

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on Bank Of America’s secure website

 

 

0% balance transfers with a fee

If you think it will take longer than 15 months to pay off your credit card debt, these credit cards could be right for you. Don’t let the balance transfer fee scare you. It is almost always better to pay the fee than to pay a high interest rate on your existing credit card. You can calculate your savings (including the cost of the fee) at our balance transfer marketplace.

These deals listed below are the longest balance transfers we have in our database. We have listed them by number of months at 0%. Although you need good credit to be approved, don’t be discouraged if one lender rejects you. Each credit card company has their own criteria, and you might still be approved by one of the companies listed below.

Discover it® Balance Transfer

Decent 0% intro balance transfer period

Discover it® Balance Transfer: Intro APR of 0% for 18 months, 3% BT fee.

This is a basic balance transfer deal with an above average term. If you don’t have credit card balances with Discover, it’s a good option to free up your accounts with other banks. With this card, you also have the ability to earn cash back, and there is no late fee for your first missed payment and no penalty APR. Hopefully you will not need to take advantage of these features, but they are nice to have.

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  • Interest is waived during the balance transfer period, no foreign transaction fees and no late fee for your first late payment
  • The range of the purchase interest rate based on your credit history.  The 13.99% - 24.99% Variable APR is fairly standard.
  • There is a cash advance fee

Tip: Complete your balance transfer as quickly as possible for maximum savings.

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on Discover Bank’s secure website

Rates & Fees

Citi® Diamond Preferred® Card– 21 Month Balance Transfer Offer

Longest 0% intro balance transfer card

Citi® Diamond Preferred® Card – 21 Month Balance Transfer Offer: 0%* for 21 months on Balance Transfers*, 5% balance transfer fee

The Citi® Diamond Preferred® Card – 21 Month Balance Transfer Offer has the longest intro period on our list at intro 0%* for 21 months on Balance Transfers* made within 4 months from account opening. There is also an intro 0%* for 12 months on Purchases*. After the intro periods end, a 14.99% - 24.99%* (Variable) APR applies. The balance transfer fee is typical at 5% of each balance transfer; $5 minimum. This provides plenty of time for you to pay off your debt. There are several other perks that make this card great: no annual fee, Citi® Private Pass®, and Citi® Concierge. This offer and/or promotion may have since changed, expired, or is no longer available.

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  • Interest is not deferred during the balance transfer period, which means if you do not pay off your balance by the end of the promo period, you will not be charged the interest that would have accrued during the deferral period.
  • Interest rate is not known until you apply.

Tip: Complete your balance transfer within four months from account opening to take advantage of the 0% intro offer.

Low rate balance transfers

If you think it will take longer than 2 years to pay off your credit card debt, you might want to consider one of these offers. Rather than pay a balance transfer fee and receive a promotional 0% APR, these credit cards offer a low interest rate for much longer.

The longest offer can give you a low rate that only goes up if the prime rate goes up. If you can’t get that offer, there is another good option offering a low rate for three years.

Variable Rate Credit Visa®Card from UNIFY Financial CU

Long low rate balance transfer card

Unify Financial Credit Union – 6.99%-18.00% Variable APR, no expiration, $0 BT fee

If you need a long time to pay off at a reasonable rate, and have great credit, it’s hard to beat this deal from Unify Financial Credit Union, with an APR of 6.99%-18.00% Variable with no expiration. The rate is variable, but it only varies with the Prime Rate, so it won’t fluctuate much more than say a variable rate mortgage. There is also no balance transfer fee.

Just about anyone can join Unify Financial Credit Union. They’ll help you figure out what organization you can join to qualify, and you don’t need to be a member to apply.

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  • Interest is not deferred during the balance transfer period, which means if you do not pay off your balance by the end of the promo period, you will not be charged the interest that would have accrued during the deferral period.
  • There are late payment fees.

Tip: If you’re credit’s not great, this probably isn’t for you, as the APR chosen for your account is anywhere between 6.99%-18.00% Variable.

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on UNIFY Financial Credit Union’s secure website

Prime Rewards Credit Card from SunTrust Bank

Long low rate balance transfer card

SunTrust Prime Rewards – 4.75% variable APR for 36 months, $0 intro BT fee

If you live in Alabama, Arkansas, Florida, Georgia, Maryland, Mississippi, North Carolina, South Carolina, Tennessee, Virginia, Washington, D.C., or West Virginia you can apply for this card without a SunTrust bank account.

The deal is you get the prime rate for 3 years with no intro balance transfer fee. That’s currently 4.75% variable, though your rate will change if the prime rate changes, either up or down, and you have 60 days to complete your transfer with no fee. After that, it’s $10 or 3% of the amount of the transfer, whichever is greater. Also beware the prime rate deal isn’t for new purchases, so only use this card for a balance transfer.

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Transparency Score
  • Interest is not deferred during the balance transfer period, which means if you do not pay off your balance by the end of the promo period, you will not be charged the interest that would have accrued during the deferral period.
  • The range of the purchase interest rate is based on your credit history: 12.74%-22.74% (v), and is more than 10%, which is high.
  • There are late payment and cash advance fees.

Tip: You have only 60 days from account opening to get the intro $0 transfer fee.

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on SunTrust Bank’s secure website

For fair credit scores

In order to be approved for the best balance transfer credit cards and offers, you generally need to have good or excellent credit. If your FICO score is above 650, you have a good chance of being approved. If your score is above 700, you have an excellent chance.

However, if your score is less than perfect, you still have options. Your best option might be a personal loan. You can learn more about personal loans for bad credit here.

There are balance transfers available for people with scores below 650. The offer below might be available to people with lower credit scores. There is a transfer fee, and it’s not as long as some of the others available with excellent credit. However, it will still be better than a standard interest rate.

Just remember: one of the biggest factors in your credit score is your amount of debt and credit utilization. If you use this offer to pay down debt aggressively, you should see your score improve over time and you will be able to qualify for even better offers.

Platinum Mastercard® from Aspire FCU

For less than perfect credit

Aspire Credit Union Platinum – 0% intro APR for 6 months, 0% intro BT fee

Balance transfer deals can be hard to come by if your credit isn’t great. But some banks are more open to it than others, and Aspire Credit Union is one of them, saying ‘fair’ or ‘good’ credit is needed for this card. Anyone can join Aspire, but if you’re looking for a longer deal you also might want to check if you’re pre-qualified for deals from other banks, without a hit to your credit score, using the list of options here.

You’ll be able to check with several banks what cards are pre-screened based on your credit profile, and you might be surprised to see some good deals you didn’t think were in your range. That way you can apply with more confidence.

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  • Interest is not deferred during the balance transfer period, which means if you do not pay off your balance by the end of the promo period, you will not be charged the interest that would have accrued during the deferral period.
  • The ongoing interest rate isn’t known when you apply.

Tip: Only Aspire’s Platinum MasterCard has this deal. Its Platinum Rewards MasterCard doesn’t have a 0% offer. And if you transfer a balance after 6 months a 2% fee will apply.

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on Aspire Federal Credit Union’s secure website

2. Learn more

Checklist before you transfer

Never use a credit card at an ATM

If you use your credit card at an ATM, it will be treated as a cash advance. Most credit cards charge an upfront cash advance fee, which is typically about 5%. There is usually a much higher “cash advance” interest rate, which is typically above 20%. And there is no grace period, so interest starts to accrue right away. A cash advance is expensive, so beware.

Always pay on time.

If you do not make your payment on time, most credit cards will immediately hit you with a steep late fee. Once you are 30 days late, you will likely be reported to the credit bureau. Late payments can have a big, negative impact on your score. Once you are 60 days late, you can end up losing your low balance transfer rate and be charged a high penalty interest rate, which is usually close to 30%. Just automate your payments so you never have to worry about these fees.

Get the transfer done within 60 days

Most balance transfer offers are from the date you open your account, not the date you complete the transfer. It is in your interest to complete the balance transfer right away, so that you can benefit from the low interest rate as soon as possible. With most credit card companies, you will actually lose the promotional balance transfer offer if you do not complete the transfer within 60 or 90 days. Just get it done!

Don’t spend on the card

Your goal with a balance transfer should be to get out of debt. If you start spending on the credit card, there is a real risk that you will end up in more debt. Additionally, you could end up being charged interest on your purchase balances. If your credit card has a 0% balance transfer rate but does not have a 0% promotional rate on purchases, you would end up being charged interest on your purchases right away, until your entire balance (including the balance transfer) is paid in full. In other words, you lose the grace period on your purchases so long as you have a balance transfer in place.

Don’t try to transfer between two cards of the same bank

Credit card companies make balance transfer offers because they want to steal business from their competitors. So, it makes sense that the banks will not let you transfer balances between two credit cards offered by the same bank. If you have an airline credit card or a store credit card, just make sure you know which bank issues the card before you apply for a balance transfer.

Comparison tools

Savings calculator – which card is best?

If you’re still unsure about which cards offer you the best deal for your situation, try our calculator. You get to input the amount of debt you’re trying to get a lower rate on, your current rate, and the monthly payment you can afford. The calculator will show you which cards offer you the most savings on interest payments.

Balance transfer or a loan?

A balance transfer at 0% will get you the absolute lowest rate. But you might feel more comfortable with a single fixed monthly payment, and a single real date your loan will be paid off. A lot of new companies are offering great rates on loans you can pay off over 2, 3, 4, or 5 years. You can find the best personal loans here.

And you might find even though their rates aren’t 0%, you could afford the payment and get a plan that takes care of your debt for good at once.

Use our calculator to see how your payments and savings will compare.

Questions and Answers

It depends, some credit card companies may allow you to transfer debt from any credit card, regardless of who owns it. Though, they may require you to first add that person as an authorized user to transfer the debt. Just remember that once the debt is transferred, it becomes your legal liability. You can call the credit card company prior to applying for a card to check if you’re able to transfer debt from an account where you are not the primary account holder.

Yes, you can. Most banks will enable store card debt to be transferred. Just make sure the store card is not issued by the same bank as the balance transfer credit card.

As a general rule, if you can pay off your debt in six months or less, it usually doesn’t make sense to do a balance transfer.

Here is a simple test. (This is not 100% accurate mathematically, but it is an easy test). Divide your credit card interest rate by 12. (Imagine a credit card with a 12% interest rate. 12%/12 = 1%). In this example, you are paying about 1% interest per month. If the fee on your balance transfer is 3%, you will break even in month 3, and will be saving money thereafter. You can use that simplified math to get a good guide on whether or not you will be saving money.

And if you want the math done for you, use our tool to calculate how much each balance transfer will save you.

With all balance transfers recommended at MagnifyMoney, you would not be hit with a big, retroactive interest charge. You would be charged the purchase interest rate on the remaining balance on a go-forward basis. (Warning: not all balance transfers waive the interest. But all balance transfers recommended by MagnifyMoney do.)

Many companies offer very good deals in the first year to win new customers. These are often called “switching incentives.” For example, your mobile phone company could offer 50% off its normal rate for the first 12 months. Or your cable company could offer a big discount on the first year if you buy the bundle package. Credit card companies are no different. These companies want your debt, and are willing to give you a big discount in the first year to get you to transfer.

If you transfer your debt and use your card responsibly to pay off your balance before the intro period ends, then there is no trap associated with the 0% APR period. But, if you neglect making payments and end up with a balance post-intro period, you can easily fall into a trap of high debt — similar to the one you left when you transferred the balance. As a rule of thumb, use the intro 0% APR period to your advantage and pay off ALL your debt before it ends, otherwise you’ll start to accumulate high interest charges.

Balance transfers can be easily completed online or over the phone. After logging in to your account, you can navigate to your balance transfer and submit the request. If you rather speak to a representative, simply call the number on the back of your card. For both options, you will need to have the account number of the card with the debt and the amount you wish to transfer ready.

You will be charged a late fee by missing a payment and may put your introductory interest rate in jeopardy. Many issuers state in the terms and conditions that defaulting on your account may cause you to lose out on the promotional APR associated with the balance transfer offer. To avoid this, set up autopay for at least the minimum amount due.

No, you can’t. Balances can only be transferred between cards from different banks. That includes co-branded cards, so be sure to check which issuer your card is before applying for a balance transfer card — since you don’t want to find out after you’ve been approved that both cards are backed by the same issuer.

Many credit card issuers will allow you to transfer money to your checking account. Or, they will offer you checks that you can write to yourself or a third party. Check online, because many credit card issuers will let you transfer money directly to your bank account from your credit card. Otherwise, call your issuer and ask what deals they have available for “convenience checks.”

In most cases, you cannot. However, if you transfer a balance when you open a card, you may be able to. Some issuers state in their terms and conditions that balance transfers on new accounts will be processed at a slower rate compared with those of old accounts. You may be able to cancel your transfer during this time.

Yes, it is possible to transfer the same debt multiple times. Just remember, if there is a balance transfer fee, you could be charged that fee every time you transfer the debt. Also, don’t keep on transferring your debt without making payments because you won’t accomplish much.

You can call the bank and ask them to increase your credit limit. However, even if the bank does not increase your limit, you should still take advantage of the savings available with the limit you are given. Transferring a portion of your debt is more beneficial than transferring none.

Yes, you decide how much you want to transfer to each credit card. For example, if you have $3,000 in debt, you can transfer $2,000 to Card A and $1,000 to Card B.

No, balance transfers are excluded from earning any form of rewards whether it’s points, miles or cash back.

No, there is no penalty. You can pay off your debt whenever you want without a penalty. It’s key to pay off your balance as soon as possible and within the intro period to avoid carrying a balance post-intro period.

Mathematically, the best balance transfer credit cards are no fee, 0% intro APR offers. You literally pay nothing to transfer your balance and can save hundreds of dollars in interest had you left your balance on a high APR card. Check out our list of the best no-fee balance transfer cards here. However, those cards tend to have shorter intro periods of 15 months or less, so you may need more time to pay off your balance.

If you are running out of time on your intro APR and you still have a balance, don’t sweat it. At least two months before your existing intro period ends, start looking for a new balance transfer offer from a different issuer. Transfer any remaining balance to the card with the new 0% intro offer. This can provide you with the additional time needed to pay off your balance. Ideally, look for a card that has a 0% intro APR and also no balance transfer fee.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Nick Clements
Nick Clements |

Nick Clements is a writer at MagnifyMoney. You can email Nick at nick@magnifymoney.com

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Pay Down My Debt

Debt Consolidation Loan Rates – What to Expect

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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A debt consolidation loan streamlines existing debts into one new loan. Most unsecured consumer debt can be consolidated, including credit cards, medical bills, utility bills, payday loans, student loans, taxes and bills sent to a collection agency. Having one monthly payment instead of several can make it easier to get your finances in order and could allow you to save money on interest fees. When shopping around, it’s essential to find a loan with a lower interest rate and better terms than the original debts.

Average debt consolidation interest rates by credit score

Credit rangeAverage interest rate

Excellent (700 & above)

10.84%

Good (640 - 699)

28.04%

Average (600 - 639)

38.83%

Poor (600 & Below)

40% and above
* These rates are based on LendingTree’s personal loans data ranging from $10,000 to $10,999 for March 2018 – August 2018

How are debt consolidation loan interest rates determined?

Paying down debt is hard work, but it’s even more challenging when you’re working against sky-high interest rates. Your credit score isn’t the only factor that plays into loan pricing, but it’s a big one. Generally speaking, the higher your credit score, the lower your interest rate.

On its website, credit bureau TransUnion explains that your credit score offers financial institutions a quick snapshot of your credit health. The manner in which scores are used is entirely up to the individual lender.

If your credit score isn’t great, don’t panic. Several other elements are also taken into consideration as part of the loan underwriting process, including:

Debt-to-income ratio

A key indicator of your financial fitness, your debt-to-income ratio allows financial institutions to weigh your current debt against your income. This helps lenders determine your ability to keep up with new loan payments. Your debt-to-income ratio is calculated by dividing the total sum of all your monthly obligations by your gross monthly income. According to guidelines set by Wells Fargo, a good debt-to-income ratio is 35% or less, a decent one falls into the 36% to 49% range and one that needs improvement is 50% or higher.

Alternative credit history

Your bill-paying habits can help or hinder your ability to get a good interest rate. It’s not uncommon for lenders to review your track record of paying noncredit accounts, such as rent, utilities and phone bill. Lenders, credit bureaus and credit scoring firms generally believe that the past is the greatest indicator of future behavior, so this data can provide telling insights.

Employment history

Loan repayment is expected to be funded by your income, so lenders want to verify your ability to hold a job. Some will dig deeper into your employment history than others. In many cases, a steady employment history will be enough, but some financial institutions prefer applicants who have worked for the same company for several years or at least have a long track record in their current industry.

How to get the lowest interest rate on a debt consolidation loan

Not all debt consolidation loans offer equal value, so it’s important to do your homework. All else equal, the lower the interest rate on your debt consolidation loan, the lower your monthly payment. You want to achieve financial freedom as quickly as possible, and much of that weighs on finding the most competitive interest rate.

Shopping around to compare multiple loan rates is a step you can’t afford to pass up, even if you have excellent credit. Each lender has its own criteria and pricing model, which can lead to major rate discrepancies. Limit your comparison shopping to lenders that perform a soft credit pull, so it doesn’t lower your credit score.

LendingTree, the parent company of MagnifyMoney, allows you to compare up to 5 lenders without affecting your credit score. Find the best debt consolidation loan for you today!

LendingTree
APR

5.99%
To
35.99%

Credit Req.

Minimum 500 FICO

Minimum Credit Score

Terms

24 to 60

months

Origination Fee

Varies

SEE OFFERS Secured

on LendingTree’s secure website

LendingTree is our parent company

LendingTree is our parent company. LendingTree is unique in that you may be able to compare up to five personal loan offers within minutes. Everything is done online and you may be pre-qualified by lenders without impacting your credit score. LendingTree is not a lender.

A low credit score won’t necessarily prevent you from getting a loan, but it could impact your ability to get a competitive rate. Most people have credit scores in the range of 600 to 750, according to Experian. For scores that fall within the 300 to 850 range, the consumer credit reporting agency cites a score of 700 or higher as good and 800 or higher as excellent.

If your current credit score isn’t great, take measures to improve it. Payment history and credit utilization can make up to 70% of a credit score, according to Experian, so simply paying your bills on time and keeping your balances low can be a tremendous help. You can also help your score by only applying for new credit only when absolutely necessary and getting a head start at paying your loans off now, if possible.

Comparing more than just rates

Interest rates play a huge role in the total price of your debt consolidation loan, but they aren’t the only factor worth comparing. Taking out a new loan is a very big deal, so conduct plenty of research to make sure you’re entering into an agreement that sets you up for success.

Fees

Many lenders tack on additional costs that can cause you to end up paying more than you were before consolidating your payments. Read the fine print to see how much, if anything, you’ll be charged for late fees, origination fees (a fee charged for processing your loan) and prepayment penalties (an added cost for paying your loan off early).

User experience

Taking out a loan should be a relatively seamless process. There are a lot of lenders to choose from, so conducting research to see which financial institutions provide the best — and worst — user experience can save you a lot of headaches. Browse each bank’s website to review customer service contact options, read reviews and search social media to see what people are saying about your top choices.

Transparency

When your financial health is at stake, you need a lender you can trust. Unfortunately, some financial institutions make it difficult to find all the information you need to make an educated decision. This can cause you to inadvertently sign up for a misleading loan that doesn’t serve your best interests. If you can’t easily find the answers to any questions you may have about a debt consolidation loan, you may want to consider another lender.

Alternative options

A debt consolidation loan can be an effective way to get your finances in order, but it’s not the only option. Before applying for a loan, take a look at other alternatives to get a well-rounded look at every available route.

If the amount of debt you’re trying to pay off is relatively small and you have a great credit score, a balance transfer credit card might be a better choice. Many balance transfer credit cards offer a 0% APR for an introductory period of time, which could allow you to pay off your debt without accruing any additional interest. This can help you save a great deal of money, but there are a few things you should know first.

In most cases, the 0% APR interest rate is a limited-time promotion, according to the Consumer Financial Protection Bureau. If the rate rises, your monthly payment could also increase. The CFPB also notes that the company can raise your rate if you’re more than 60 days late on a payment. Additionally, you may have to pay a balance transfer fee, and if you also use the card to make purchases, the new charges may be subject to interest unless there’s also an introductory 0% APR for purchases.

If you own a home, you might also consider a home equity loan or a home equity line of credit, which will provide you with extra cash. Home equity loans come at a fixed rate, while home equity lines of credit have variable interest rates and follow a flexible repayment structure. Borrowing criteria vary by lender, but the amount of equity you have in your home will at least partially factor into the size of the loan you’re able to take out. More equity tends to equate to better terms.

The best rates are typically given to homeowners with a mortgage that totals less than 85% of the home’s value and a debt-to-income ratio of 45% or less. This can be a great way to consolidate debt, but do remember you can lose your home if you don’t keep up with payments.

Taking out a home equity loan could also require you to pay closing costs that can add up to hundreds or thousands of dollars, according to the CFPB. If the property declines in value, you could also run the risk of falling underwater on it. With that said, a home equity loan or a home equity line of credit could serve as an optimal way to pay off debt. As with any major financial decision, being well-informed will help you make the best choice for your unique situation.

Where to find the best debt consolidation loans

Shopping around and comparing personal loans for debt consolidation is essential, but you might not know where to start. Visiting the website of every lender that offers debt consolidation loans isn’t feasible, but LendingTree, the parent company of MagnifyMoney, has a one-stop tool that can recommend several debt consolidation loan offers.

Simply complete one online form, and LendingTree will run a soft credit pull that could match you with multiple loan offers. This is a convenient way to connect with multiple lenders in a matter of minutes. Participating lenders have a range of acceptance criteria, so you could find an attractive rate even if your credit score isn’t the best.


Compare debt consolidation loans and save money with the best rates you can find

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Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Laura Woods
Laura Woods |

Laura Woods is a writer at MagnifyMoney. You can email Laura here

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