It is possible that you can get one big loan to consolidate debt and pay off all your little loans, at a lower interest rate than you’re paying now. Be very careful. When you’re in a hole, the first rule is to stop digging. But this is an option that you might explore, especially if you own a home with a fair amount of equity.
You could even consider selling your house to pay off your debts. This is not a time to be sentimental. You have to take a cold, hard look at your options and decide which one makes the most practical sense. There are lots of factors to consider here, such as the tax break for paying mortgage interest and whether you could rent a place for the next several years for the same amount you’re now paying on the mortgage.
If you have a lot of equity in your house, it makes sense to consider tapping into it. You’re sitting on a pile of cash you could use to consolidate debt that has built up and to get into a more stable financial situation. Don’t liquidate anything without being sure of the consequences. If you sell your house for a great deal more than you paid for it, you could have to pay a capital gains tax. Consult with an accountant or tax attorney before taking this step to pay your debts.
Negotiate with the Creditors
It’s called a “workout”—you get your creditors to agree to take a smaller amount than you actually owe. You write to all your creditors and tell them that you are considering bankruptcy but would really rather avoid that and consolidate debt if they would just cooperate. Offer to pay them a lump sum, perhaps fifty cents on the dollar. Or you could offer to pay over time with specific amounts, perhaps at a lower interest rate.
Smaller, independent creditors such as local merchants and doctors are more likely to work with you. But having a successful workout means getting everybody to go along with the program. It makes no sense to pay some cooperative creditors and end up having to file bankruptcy anyway.