Child support debt consolidation: How to get a loan to pay off child support
Falling behind on child support payments can be extremely tough on your budget, especially in states that apply interest charges. The debt can add up quickly and lead to a range of consequences you don’t need, including wage garnishment and jail. So, if you owe back child support, it’s crucial that you find a solution to catch up. Luckily, there are affordable options that can help you catch up.
What are child support arrears?
Child support arrears happen if you don’t make monthly child support payments according to your court-assigned schedule; this is also common referred to as “owing back child support.”
According to federal law, states have the right to apply interest charges if you owe back child support. The rate you pay depends on where you live. Currently, 35 states apply interest charges and the rate can go as high as 12 percent. That’s about the same rate you’d pay on a low-APR credit card; but credit cards have notably higher interest rates than other types of financing. As such, interest charges on child support arrears can add up quickly.
What’s at risk with child support arrears
If you don’t keep up with court-assigned child support payments, things can go bad quickly. Depending on the state where you live they can:
- Suspend your license
- Garnish your wages
- Intercept your tax refund
- Seize your property
- Throw you in jail
If you owe $2,500 or more, you can also be denied for a passport. None of those outcomes are good and many will put you in a position of extreme hardship. Unfortunately, the courts are not very forgiving either. You may be able to get the order adjusted if you think you’re overpaying. However, even bankruptcy won’t discharge child support arrears that you already owe.
Child support debt consolidation
The best way to pay off child support arrears is often to consolidate the debt. This is especially true if you live in a state like Colorado or Vermont where the rate is 12 percent. That kind of interest adds up quickly, so it’s often a smart financial choice to use a low interest rate loan to consolidate the debt.
Here’s how it works:
- You take out a loan at an interest rate set based on your credit score.
- You can adjust the term loan to get monthly payments that work for your budget
- A longer term means lower monthly payments, but higher total interest charges.
- A shorter term increases the monthly payments, but decreases the total cost.
- Once approved, you use the funds you receive to pay off the child support arrears.
- This brings you current with your child support payments to avoid all the outcomes listed above.
- Then all you need to do is pay off the loan and keep up with your current child support payments to avoid new interest charges.
Your credit score determines what interest rate you’ll pay on the loan, so good credit is better for the rate. Still, in most cases the rate on the loan will be lower than the interest rate charged if you owe back child support.
There are several types of financing options that you can use to pay off child support arrears, but one stands out among the other options…
The Best Way to Consolidate Child Support Debt: A Personal Consolidation Loan
By far and away, the best way to consolidate child support debt is with an unsecured personal debt consolidation loan. This is basically just an unsecured personal loan that’s specifically used to pay off debt. You don’t even have to limit it to paying off child support alone. You can use the funds you receive to pay off many types of unsecured debt:
- Credit cards
- Store credit lines
- Medical debt
Many times, when people take out a credit card debt consolidation loan, they include other debts, like child support arrears. This effectively knocks out a few financial birds with one loan.
Why is this the best way to consolidate child support debt?
An unsecured loan is the best option because it’s the one type of consolidation loan that doesn’t trade one risk for another. “Unsecured” means there is no collateral attached to the loan. If you fall behind with the payments, the debt goes to a collector. Then they can take you to civil court, where you could be ordered to pay. The worst that can happen is wage or tax refund garnishment. But you won’t face jail time as you do with child support arrears.
By contrast, other types of consolidation loans are secured. For instance, homeowners can use a home equity loan or a Home Equity Line of Credit (HELOC) to consolidate debt. However, both options are secured using your home as collateral. That means if you fall behind on the payments, you could face foreclosure actions.
This is what we mean about trading one risk for another. You pay off your child support to avoid jail time, but now you have increased the risk of foreclosure. As long as you keep up with the payments, it shouldn’t be a problem. But, if you’ve fallen behind on child support, money is probably pretty tight. So, the risk is there.
Can you qualify to get a loan to pay off child support debt?
This all depends on your credit score. If you have at least fair credit, then you should get approved for a personal loan. However, your score will determine the amount you can receive and the interest rate. And it’s definitely worth mentioning that just because you can qualify, this isn’t guaranteed to provide the benefit you need.
This is where you need to do some calculating:
- First, you need to know the total amount of child support arrears you owe.
- Then you also need to know the interest rate applied to that debt in the state where you live.
- Now you know how much money you need to apply for with the loan.
- Once you apply, the lender will tell you the rate you qualify for during the underwriting process.
If you can’t get a loan large enough to cover your total child support arrears, then this may not work. More importantly, if you can’t get a rate that’s lower than the rate applied to your arrears, then there’s less benefit in consolidating!
If you don’t face interest charges on child support arrears or you can’t get a lower rate than the one already applied, why consolidate? The only benefit left is that you can avoid jailtime. That still may be enough, depending on the severity of your situation. But remember, if you fall behind on a personal loan and the collector sues you in court, they can still garnish wages, intercept tax refunds, and seize property if the court allows it.
Article last modified on February 11, 2020. Published by Debt.com, LLC