Bad Debt Loan - Don't Get Trapped
Taking out a loan to pay off a debt or multiple debts (a debt consolidation loan) may not necessarily be a good idea. They are not all the same. You really need to speak with a financial expert before considering these debt reduction programs. One of the maybe not-so-good ideas of paying off debt is to refinance your home. Why can that be a bad debt loan in more ways than one? Refinance Your Home? When you refinance your house you are essentially taking out a new loan against your house, replacing your previous home loan. Refinancing is often referred to as a “re-fi.” At first it may sound like a great solution, especially in hard times. But think twice before you go ahead with this type of bad debt loan. Paying off debt this way takes expertise. It’s not just a matter of completing an application and getting the money.
Let’s say you have excessive credit card debt – one or several credit card accounts. Maybe an unpaid utilities bill too. These are “unsecured debts” – meaning, you haven’t put up any collateral against the debt that can be legally taken later. If things in life get really difficult, your account goes into collections, but you don’t, for instance, lose your house over it. 
Those Collection Phone CallsNow let’s say your credit cards, or utility bills, or medical bills, or loans have gone into collections, and you have been receiving those collection letters and pressuring phone calls (if you answered the phone). If you talk to these people, they may encourage you to take out a loan, including refinancing your home. They don't care if this could be a bad debt loan for you. The first thing you need to understand is there are federal laws governing collections and what a collector can and cannot say and do to you. It's called the Fair Debt Collection Practices Act (FDCPA). You absolutely must know this information -- read our summary page on
Debt Collection Laws
that lists the important collector Do's and Don'ts that you need to know. If you want to have your own copy of the actual FDCPA document, then read our page on the Fair Debt Collection Practices Act, and
download your own copy of the actual FDCPA law
itself.
The collector on the other end may be full of “solutions” of how you can come up with the money. (Remember, they really want that commission). Like, cashing in your retirement fund. Making monthly payments to them. Borrowing from a relative. Taking out a loan and having a relative co-sign. Even using another credit card to pay off this credit card. Or refinancing your house. A good or bad debt loan does not matter to them. 
Perhaps you are considering one of the above solutions, and refinancing your home can seem a pretty easy way to pay off debt.
There are some things that could happen, though… If you already have judgments against you, these judgment amounts must be paid off before you can refinance. And how much will be left for debt consolidation? Can you afford to take this step right now? Keep in mind, with refinancing there are Terms, closing costs and extra fees and charges, just as when you buy a new home. You may not need some of these extra charges and services or products, but if you don’t know what it’s about, you won’t know what to do. Not all deals are the same, especially if you have a history of debt. Are you able to tell a good deal from a bad? Will your payment go up or down? Will your interest rate change for the better or worse? Never refinance at a higher rate – it can increase your monthly payments, and you can lose much money over time -- lots. And there is all kinds of “creative” financing out there – although banks have tended to become more conservative recently. You need to know what you are getting into so you do not get in over your head. You must know exactly what the payment Terms involve so you are not in for a big surprise in the future. Refinancing Will Now Put Your House at Risk – 
Throughout the course of the collection process, the creditor (company you owe money to) certainly may obtain a judgment against you. What does that mean? This is a legal action in which they can initiate a garnishment against your bank account if they know where it is, or your wages if you are working, or even a federal tax return. However, they cannot cause you to lose your home. They can’t access your property unless you decide to refinance or sell. Then the judgment will be paid off. In other words, the only way you can lose your home is if you default on your mortgage payments and it goes into foreclosure. Talk about a bad debt loan. Is it worth the risk to refinance for unsecured debt that you could have put on hold for awhile or dealt with differently? Are these debt reduction programs what you really want? If you refinance with a poor deal and get in over your head and you can’t make the payments, your bad debt loan has turned into a really bad debt loan. Another Word About Judgments and Garnishments. You also need to know that much elderly income is “exempt” – it’s safe and cannot be included in garnishments. This would include Social Security income and disability income. If you can prove the money in your bank account is from an exempt source, it may be safe. So if a collector gets a garnishment against your bank account, you don’t work, and the bank account contains exempt income, they probably will not be able to collect from you. But if something happens regarding your home – you refinance or sell it, by law they have a right to have their judgment paid off. It’s best to consult with an attorney or financial professional about consolidation loans, especially refinancing your home. If you are on a limited income, you may qualify for reduced or free Legal Aid. A bad debt loan can be more complicated than it appears. You can also call HUD at 1-(800) 569-4287, to get help. Return from Bad Debt Loan,
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