How to Consolidate Your Debts in Illinois

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Written by the Upsolve Team.  
Updated December 11, 2019

Summary

Now that we’ve gone-over some general information, the next several sections will give you a more detailed explanation of how debt consolidation works. Once you complete the exercise, you should have a better idea of whether debt consolidation is a good fit for you. If debt consolidation isn’t for you, the guide also has information about other debt relief options.

If you’re struggling with the weight of your own debt, bear in mind that even successful businesses need help from time-to-time in settling their debts. For example, in 1930, James Dewar, an Illinois baker, invented the Twinkie: the iconic American cream-filled sponge cake. Despite its popularity, in 2012, the Twinkie was facing extinction since its parent company, Hostess, was on the brink of financial ruin. However, through the bankruptcy process, Hostess was able to reorganize, and the Twinkie has made a sweet comeback. If you’re feeling pressure from creditors, there are a number of debt consolidation options available that may help you make a similar turnaround.

Generally speaking, debt consolidation combines all of your debt (student loans, auto loans, medical bills, credit card debt, etc.), which you then pay through a single monthly payment. Consolidation can be hugely beneficial because it allows you to simplify your monthly bills by only having to deal with one creditor, which should help you avoid any late fees for missed payments. Also, debt consolidation may help you save money since many of the options available offer a lower rate of interest. 

As we discuss below, there are multiple ways of consolidating your debt, ranging from taking-out personal loans or home equity loans to accepting an offer for a credit card balance transfer. Credit counseling agencies can also assist in creating a debt management plan, while debt settlement companies can negotiate down the principal of certain individual debts. The specific type of debt relief available to you will be dependent upon the type of debt you have and your credit score. What these options all have in common is that they offer a way to becoming debt-free, which is the ultimate goal.  

Learn More Through Free Nonprofit Credit Counseling

Reading online articles is a good way to learn general information about debt management and consolidation, but speaking to a credit counselor can help you get personalized information about your specific financial situation. Since credit counseling is free and confidential, meeting with a credit counselor can be beneficial for anyone with debt. 

During your meeting, come prepared with information about your income, expenses, and debt. Your credit counselor will review this information with you and together you can outline your financial goals and design an action plan to make your goals a reality. Credit counselors can also refer you to additional information and available programs, like creating a debt management plan or budget counseling. It’s important to note that legitimate credit counseling agencies do not offer debt consolidation loans as a service because they’re not banks.  

As with any financial relationship, you’ll want to make sure that you’re dealing with a reputable credit counseling organization. Before you meet with any counselor, check with the National Foundation for Credit Counseling, which maintains a list of accredited nonprofit credit counseling agencies. Credit counseling should be free and confidential, so if you meet with a counselor that tries to charge you for this service, walk away and find another agency.

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How to Consolidate Your Debts in Illinois

Now that we’ve gone-over some general information, the next several sections will give you a more detailed explanation of how debt consolidation works. Once you complete the exercise, you should have a better idea of whether debt consolidation is a good fit for you. If debt consolidation isn’t for you, the guide also has information about other debt relief options.


Collect the Details About Your Debts

The first step in determining whether debt consolidation is a good option for you is determining the full extent of your debt load and identifying all of your creditors. For this exercise, you will want to create a list that shows all of the types of debt that you have, the interest rate being charged, your required monthly payment, your balance, and whether you are current or behind on this bill. Don’t try to do this based off of your memory. Instead, pull together your most recent statements for all of your credit cards or other bills. Since these bills come directly from your creditor, you will want to base your calculations on their records.

Another great source of information is your credit report. You can request a free credit report from the three credit reporting agencies once per year. For an additional fee, you can also purchase access to your credit score. This information will be useful in two ways. First, you’ll be able to review your full credit history to ensure that you captured all of your potential debt on your list. Second, knowing your credit score will allow you to assess whether you have relatively good credit, bad credit, or somewhere in between. This information will help you gauge whether you’re likely to qualify for a favorable debt consolidation loan or should consider other debt relief options. 

Determine Your Monthly Income

Because debt consolidation is generally a good option for people who have a steady income, but have difficulty remembering to timely pay or experienced a short blip in their earnings, being able to figure out your actual monthly income is important. This exercise may be more difficult for non-salaried employees than for people who have a set annual income.

If you earn an annual salary, take a look at your most recent paystub and identify your gross wages. If you are paid weekly, multiply that amount by 52. If you are paid bi-weekly, multiply that amount by 26. Now that you have determined your annual salary, divide this amount by 12 to determine your monthly income. 

If you’re paid hourly, refer back to your last few pay stubs and see how many hours you worked. Were these weeks normal weeks for you? Did you work overtime or receive a commission that was out of the norm? Since the purpose of this exercise is to determine with some precision your actual monthly income, omit any earnings from your calculation that are irregular or unusual (this could include child support, alimony, or other payments that are due to you but you have difficulty collecting). Adding these earnings may make it look like you make more than you actually do. With that in mind, estimate the hours you usually work over a week. Then, multiply your hourly wage by your typical work hours, and multiply that number by 52. Divide that number by 12 to get your gross monthly income. 

Unfortunately, we also have to factor-in tax deductions. Illinois has a flat income tax rate of 4.95%. When combined with the federal tax rate, your take-home pay will likely only be about 75% of your income. So, take the number that you determined was your monthly income, and multiply it by 0.75. The result will be your after-tax monthly income, which is the amount that is actually available for living expenses, savings, and debt repayment.

Put Together Your Budget

Now that you know your monthly income and the extent of your debt, you need to understand where your money goes each month. Even if you’re not in debt, budgeting is a critical tool for setting and accomplishing your financial goals. If you don’t have a handle on your cash flow, it may only be a matter of time before you run into financial trouble.

In this exercise, you want to focus on identifying and classifying your monthly and quarterly expenses. First, analyze your last three months of credit card bills and bank statements. Create a spreadsheet and create a column for those expenses that are fixed and don’t fluctuate very much each month (like your rent or mortgage payments, car insurance, commuter costs, data plans, etc.). In the next column, identify those expenses that are variable each month, such as gas, utilities, entertainment, and groceries. Add those expenses to see how much you are spending over the course of a month. Are you surprised by any of these costs? Do you see any areas to reduce or eliminate any costs? If so, highlight those and set a goal for yourself.

Next, look at your expenses and brainstorm to identify those costs that occur infrequently over the course of the year, like medical co-pays, oil changes, excise taxes, registration costs, etc. These costs still need to be accounted for in your budget, so create another column in your spreadsheet to list these costs. Add them up and divide by 12 to calculate the monthly expense for these irregular expenses.

Finally, and importantly, add 10% to your total monthly expenses for an emergency fund. It’s hard to expect the unexpected, but there will be situations in life that you couldn’t anticipate. If you’ve set aside some money for those truly unexpected events, you will be less likely to incur additional debt when you’re blindsided by a curveball that gets thrown at you. 

Do the Math

The final step in this exercise is determining what, if any, monthly income you have left after you’ve made your debt payments and factored-in your monthly budget. Total all of the debts that you identified in Step 1 to find your approximate loan amount. Since most debt consolidation loans have a loan term of five years, divide your total debt by 60 (i.e., 12 months over five years) to determine your estimated monthly loan payment. Then, subtract your monthly loan payment amount from your monthly income. Compare what remains of your monthly income to your monthly budget: does your income cover your budget? If so, an Illinois debt consolidation loan may be an option for you to refinance your debt. If not, are there any expenses that you can reduce or eliminate? 

Review Your Illinois Debt Consolidation Options

If you completed the above exercise and determined that your income can cover your estimated monthly loan payments, then there are a few different types of consolidation options to consider, including credit card balance transfers, home equity loans, personal loans, unsecured debt consolidation loans, and debt management plans. The range of options available to you will be largely dependent upon your credit score, the type of debts you have, and whether you have any assets to borrow against.

The most common type of debt consolidation is a credit card balance transfer. In short, a credit card company will offer you a new line of credit that allows you to transfer your unsecured debt balance from one credit card to the new card. The idea behind this option is that you would be moving your high-interest debt to a new card, which will be charging you interest at a lower rate. If you have good credit and the bulk of your debt is related to high-interest credit card debt, then this option may be a good fit. However, before you accept any offers from a credit card company, make sure you read the fine print for any traps in the repayment terms: some of these offers charge a balance transfer fee, while others consider a late payment to be an event of default (which results in a higher interest rate). Also, make sure that the repayment period gives you enough time to pay off the balance, otherwise you may end up stuck in a cycle of needing another balance transfer. 

If you have a high-value asset, like a home or business, you may be able to borrow against the value of that asset. For example, if your home has increased in value since you purchased it, you may be able to qualify for either a home equity loan or a refinance of your mortgage. Both of these loans generally offer better interest rates than unsecured loans or personal loans, but this comes at a risk: if you default on your mortgage or home equity loan, you could risk losing your home. Also, mortgages and home equity loans have lengthier loan terms, so you could actually pay more in interest over the long run. The total amount of your loan will also include costly fees charged by the underwriters for things like appraisals, origination fees, and legal fees. 

If you don’t have an asset to borrow against, some banks, credit unions, and online lenders offer personal loans to consumers with good credit scores so that they can consolidate and pay off their debt. These types of debt consolidation loans are pretty easy to apply for, but you may need to have a debt-to-income ratio that doesn’t exceed 50%. If you qualify, you will be able to combine different types of debt (auto loans, credit card debt, medical bills, student loans, personal loans, etc.) into a single monthly payment. Like the secured loans discussed above, these personal loans offer you a fixed interest rate and term of years to repay the loan, but you may be charged an origination fee or other administrative costs. 

Alternatively, and as will be discussed below, many credit counseling agencies can assist in creating a debt management plan, which similarly allows you to submit one single payment each month, but doesn’t require you to take out a new loan or new line of credit in the process. 

Apply for an Illinois Debt Consolidation Loan

If you are considering taking out an Illinois debt consolidation loan, make sure to research any potential lenders before you disclose any of your financial information. The financial industry is full of scam artists, so if an offer seems too good to be true, it probably is. You should consider immediately walking away from any lender who acts aggressively, fails to directly answer your questions, or requires money up-front. Before contracting with a financial partner, you can check with the Better Business Bureau to ensure that the company is legitimate. In addition, you can contact an accredited Illinois credit counseling agency (look for an agency that’s a member of the National Foundation for Credit Counseling) in order to discuss your loan or debt management plan options and to obtain additional debt relief resources.  

How to Stay Current with Payments After Consolidating Your Debts in Illinois

The key to a successful debt consolidation and repayment plan is ensuring that you are able to make appropriate and timely payments. You can use the following strategies to stay ahead of any potential pitfalls. 

  1. Automatic payments are your friend. Meaning, if your employer offers direct deposit of your paycheck, use it. If your lender allows you to schedule automatic monthly payments, do it. Automatic bill pay is usually free and will help eliminate the possibility that you will pay late and incur unnecessary charges or default on your obligations. Of course, if a certain amount is going to be automatically deducted from your bank account each month, you have to make sure that you have enough funds to cover the bill. Most creditors and lenders will allow you to set your own due date. So, choose a date that makes sense to you. 

  2. Keep analyzing your spending habits. Try to get comfortable with making distinctions between things you need and things you want. For “wants”, try the “three visits” method: only buy something that you desire if you have gone back to visit that item three times. If, on the third visit you still want it (and you have the money for it), then make the purchase.

  3. Don’t forget to plan for emergencies. We know it sounds trite, but we’ve all been in situations where, despite your best planning, you get knocked a little sideways by unforeseen circumstances, so try to guard against that. Each month, set aside some money and place it into an “emergency fund.” Only touch this money if you have encountered a truly unexpected expense that requires immediate attention, like a medical issue. 

  4. Pay yourself! Monitoring your budget and keeping to your plan is hard work, so pay yourself a small stipend each month. You can use this money to reward yourself with a small indulgence at the end of the month or aggregate it and use the savings to celebrate larger milestones. If you can make saving fun, then you will be more likely to stay on target and accomplish your goals.

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Illinois Debt Management Plan

A debt management plan is another form of debt consolidation. An Illinois debt management plan is similar to an Illinois debt consolidation loan in that it combines all of your debt into a single monthly payment. Instead of paying a lender, though, you work with a credit counseling agency, which accepts your monthly payment and then distributes it to your creditors based on an agreed-upon payment plan. By negotiating on your behalf, the credit counseling agency may be able to get creditors to charge you a lower interest rate or waive fees in return for timely repayment. If you have largely unsecured debt (like credit card debt) and the ability to commit to a payment plan, then an Illinois debt management plan may be an avenue to financial freedom.

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Illinois Debt Settlement

If you are generally up-to-date on your bills, but you have a small number of creditors that account for the bulk of your debt, debt settlement may be a good option for you. With debt settlement, you or a debt settlement company you hire negotiate to reduce the amount that you owe certain creditors. Unlike debt consolidation (which provides you with a long-term payment plan), if one of your creditors agrees to reduce your debt under a debt settlement, you will likely be required to immediately provide a single lump-sum payment to pay off the debt.  You may also be taxed on the amount of the debt that the creditor forgives. This tactic can be risky because creditors are under no obligation to accept a settlement offer, and creditors may continue to assess you late fees or default interest while it negotiates with your debt settlement company. Given the risk, it’s prudent to learn more about the various debt settlement companies and services they offer before entering into an Illinois debt settlement.  

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Illinois Bankruptcy

At the beginning of this article, we discussed how the Twinkie was able to make a comeback after its bankruptcy, to the delight of many Americans. Consumer bankruptcy is no different: it offers honest consumers a chance at a fresh financial start. While filing for bankruptcy has serious consequences, like damaging a filer’s credit score and preventing the extension of new credit or new loans for a period of years, it can also be the best option for obtaining debt relief in certain circumstances. For example, if you realize that your monthly income was not capable of covering both your debt payments and your basic monthly needs (even after you reduced expenses), you may be a good candidate Chapter 7 bankruptcy in Illinois. Or, if you’re underwater and you are concerned that your home may be foreclosed, Chapter 13 bankruptcy may help you save your home and erase some debt. If you are thinking about filing an Illinois bankruptcy, Upsolve can provide additional information and assistance with your bankruptcy. 

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