Debt Consolidation

For some consumers, bills can reach a point where they are overwhelming. If you are overwhelmed with debt and considering bankruptcy, you should also consider other options. One alternative to bankruptcy is debt consolidators, agencies that promise to reduce debt and make it more manageable. While using such a company can help people resolve their debts, there are some things that you should know before using a debt consolidator.

What Is Debt Consolidation?

Generally, debt consolidation consists of a third party consulting with you on your debt. A debt consolidator will negotiate a payment plan for your outstanding debts with your creditors, and you will make regular payments to the debt consolidator for disbursal among those creditors. A reputable consolidator will advise you on managing a budget so that you can avoid problems in the future.

Related Services

Companies claiming to help you with budget problems may offer other services such as credit repair, secured credit cards, or mortgage reduction. Credit repair services involve the company disputing information on your credit report that may be inaccurate or outdated (keep in mind that timely, accurate information cannot be removed). Secured credit cards are cards that require a deposit; they can be useful for those with budget and credit problems who could not otherwise obtain a credit card. Mortgage reduction entails the company arranging refinancing or a payment plan where you pay your mortgage biweekly instead of monthly.

New York State Law

New York State law affects debt consolidation in several ways. One law covers "budget planning," where the debtor pays the budget planner regularly who in turn makes payments to creditors based on an agreed upon plan. In New York State, a budget planner must be a non-profit corporation or an attorney. These non-profit corporations are required to be licensed by the Department of Banking. Other individuals or companies are prohibited from performing budget planning services as defined by this law.

Since many debt consolidators also perform credit repair services, credit repair laws apply as well. In New York State, any advance fee for credit repair, such as a "consultation" fee, is illegal. It is also illegal for a company to misrepresent that a credit report can be "wiped clean" if the information is timely and accurate. There are also regulations for the format of a credit repair contract. The BBB has additional information available on credit repair, which includes tips on how to repair your credit yourself.

What About Bankruptcy?

There are two bankruptcy filings that would apply to most individuals. Most filings come under Chapter 7. Under Chapter 7, some of your property may be sold to pay off a portion of your debt, but the remainder of your debt will generally be forgiven. Chapter 13 allows you to work out a payment plan over 3-5 years. In order to file under Chapter 13, you must have enough income to pay all or a reasonable portion of your debt over the payment period. You also cannot owe more than $350,000 in secured debt (where creditors have rights to specific property such as a mortgage), and $100,000 in unsecured debt.

Some debts are never forgiven under bankruptcy filings. You will still be responsible for alimony and child support, some tax claims, and most student loans. In addition, a personal bankruptcy will appear on your credit report for 10 years following a filing. A bankruptcy item on your credit report can make any future dealings with prospective lenders and creditors difficult. The cost of filing is $160, not including attorney fees.

Consumer Tips

Do it yourself. If it is at all possible, begin to manage your debts yourself. Contact your creditors and work out payment plans with them; they would rather know that you are planning to pay them regularly than to get nothing at all. Also be sure to think about how you are going to plan your budget in the future so that you avoid future debt. A reasonable budget may look something like this:


  • Housing (mortgage or rent) 25%-30%
  • Food (groceries, household items, meals out) 15%-20%
  • Transportation (car maintenance and insurance, public transportation) 10%-15%
  • Household (utilities, fuel oil, minor repairs) 10%
  • Clothing 5%
  • Health (costs not covered by insurance) 5%
  • Personal (personal care, recreation) 5%
  • Insurance (personal property, life health) 5%
  • Debt (credit cards, car and personal loans, etc.) 15%-20%
  • Savings 5-10%

(Based on a monthly budget consisting of after-tax income for a family of four. Every family's needs are different; you may have expenses that are different or exceed the ones listed above. But, if one of your monthly expenses dramatically exceeds the percentage suggested, most experts suggest that you reevaluate your budget.)

Reducing unnecessary expenses is essential to any budget plan. You should also look for sources of financial assistance from private or governmental agencies. If you have any savings, it is advisable to use as much as possible to pay off your debts; it is usually a good policy to reduce high-interest loans and credit accounts quickly. And above all, avoid incurring new debt.

Make sure the debt consolidation organization you use has non-profit status. Remember that in New York State, budget planners need to have non-profit status and be licensed by the Department of Banking unless they are attorneys.

Budget planning involves long-term as well as short term advice. Your debt consolidator should advise you on how to stay out of debt, not only how to get out of it.

Bankruptcy is not the only option. Declaring personal bankruptcy should be your last resort. Consider what the consequences are of filing for bankruptcy.

Beware of firms that make vague claims about their services. A firm that claims to be able to help you with debt or credit problems may be just offering services such as secured credit cards or credit repair. While these services may be part of a long-term budget plan, there is no such thing as a "quick fix" to a serious budget problem.

Beware of large advance fees. No reputable non-profit debt consolidator will ask for more than a small fee in advance. Again, any advance fee for credit repair is illegal in New York State.

For more information:

National Foundation for Consumer Credit
8701 Georgia Avenue, Suite 507
Silver Spring, Maryland 20910
(800) 388-2227

Call or send a self-addressed stamped envelope for the nearest member non-profit consumer credit counseling service (CCCS). These over 1,100 local CCCS offices will provide debt consolidation services for a nominal fee.

The New York State Department of Banking
2 Rector Street
New York, New York 10006
(212) 618-6445
Call to find out whether a debt consolidator is licensed.