Ask the Dollar Diva By Dorothy Rosen • Bankrate.com

I'm broke. Can I use home equity to pay bills?

Dear Dollar Diva,
I'm in a serious financial situation. I have misused and abused my credit cards, and now I can't even make the monthly payments on time. In some instances, I am more than 30 days past due. I am a teacher, and I am $35,000 in debt.

I need some guidance and advice. What's better -- a debt management plan or a home equity loan? How does a home equity loan really work? Do you have to report either of them on tax returns?

The Diva doesn't know what kind of debt makes up the $35,000, so she will assume it's credit card and student loans. Here is some information that may help you decide what to do.

Debt Management Plan

The National Foundation for Consumer Credit is the umbrella for nonprofit consumer credit counseling services all over the country. There is little or no cost for the services. Most of the agencies are called Consumer Credit Counseling Service and they:

• Work with lenders to negotiate a repayment schedule you can afford -- including making efforts to get finance charges reduced or waived

• Develop a payment plan you can afford

• Help you re-establish credit when your current debts are paid off

If you participate in a CCCS program it will show up on your credit report, but remember, your credit is already blemished, your financial life is a mess, and you need to take drastic measures to get back on track.

April Lewis of the Consolidated Credit Counseling Services in Fort Lauderdale, Fla., says clients' tax filings are not affected by seeking help from her agency.

Student Loans

Student loans backed by Uncle Sam can be consolidated or stretched out in a number of ways. There are no fees for a consolidation, and your final interest rate is generally a weighted-average of those on the loans that are being consolidated, with a cap. You can expect the current cap to be somewhere between 8 percent and 9 percent.

When you extend the time to pay off your loans, you also extend the time you will be paying interest on these loans. When you're desperate, stretching out loans at the low, student loan interest rate is often the best option. Contact your lender or try the federal Department of Education, Nellie Mae, Sallie Mae or USA Group for refinancing information.

There is no tax consequence to extending the time to pay off your loans.

Home Equity Loan

The difference between what you owe on your mortgage and the market value of the home is your equity. It's the money you would have before closing fees and commissions were paid if you sold your house. You can usually borrow as much as 75 percent or 80 percent of the market value of your home. That's total borrowing and includes your original mortgage.

The advantages of using a home equity loan to pay off your credit cards:

• The interest rate will be lower than the rates the credit card companies charge

• The interest will probably be deductible if your itemized deductions are more than your standard deduction. If it is deductible, you report it on Schedule A, Itemized Deductions, of your 1040 tax return.

If you borrow more than 100 percent of the value of your home, or if the home equity loan is more than $100,000, some of the interest will not be deductible.

The disadvantages of using a home equity loan to pay off your credit cards:

• If you suck the money out of your home to feed your spending habit, you may end up homeless. You're going to be one unhappy camper if you have to keep all that stuff you bought on credit in a shopping cart

• If you use your home to pay off credit card debt you lose your safety net

• Taking out more debt to pay off current debt is a loser's game.

The Diva hears you: You have misused and abused your credit cards. You need to deal with your spending problem before you can even think about touching the equity in your home. She doesn't know how you got where you are, but if it had to do with compulsive behavior she recommends group therapy to get the problem under control.

You have a lot of debt, and paying off $35,000 is going to take time and discipline, but others have done it and so can you. You've taken the most important first steps -- recognizing the problem and looking for ways to solve it. Now, put away those credit cards, roll up your sleeves and get to work.

DOROTHY ROSEN has a master's degree in finance, with a specialization in accounting, from the Kellogg Graduate School at Northwestern University in Evanston, Ill. Rosen has more than 15 years of experience in the financial arena, serving in Illinois and Florida as a certified public accountant, financial consultant, expert witness and educator. She is owner of Dorothy Rosen, CPA, a public accounting firm that serves individuals and small businesses.