Is debt consolidation a good alternative to filing bankruptcy?
With the various economic issues facing many Americans today—such as the increase in credit card debt, the decrease in the value of homes, and the surge in the unemployment rate—there are many companies offering debt consolidation services. You likely have seen or heard various advertisements for this service on television, radio, and in print media, which tout the benefits provided by debt consolidation. If you have more debt than you can afford to pay, you may be wondering what debt consolidation is exactly and if debt consolidation is a viable alternative for you to filing bankruptcy.
Debt consolidation is a process that allows you to take more than one existing debt on which you currently make payments and combine them into a single monthly payment. This is done by taking out a loan to pay off all the other debts, allowing you to then make a single monthly payment on this new loan.
In theory, debt consolidation can be a good option for you if it allows you to turn your existing unaffordable debt payments into a monthly amount you can afford to pay. However, there are other factors you should consider before you enter into a debt consolidation.
Like any other loan, the lower the interest rate on a debt consolidation loan the better from your perspective. Depending on the type of loan you obtain to consolidate your debt, it will affect the interest rate you are charged on that loan. If you are able to obtain a secured loan, which is a loan that is attached to an asset you already own, you will generally get a much lower interest rate than if you take out an unsecured loan. A common example of a secured loan is a home equity loan, because the loan is tied to equity you have in your house. The downside of a home equity loan is that if you do not make the payments, the lender could foreclose on your home, so this possibility should be considered in making the decision.
Length of Loan
How long is the loan, or put another way, how many payments will you have to make to complete the debt consolidation loan? While extending the loan over a longer length of time can seem like a good idea, because it will reduce your monthly payment more than will a shorter loan, the longer-term long can cost you more money, because you will continue to pay interest each month on the unpaid loan balance.
If you go through a debt consolidation company to arrange the consolidation loan, be extremely careful in selecting a reputable organization. Given the large number of people who are looking for debt relief, who do not have experience in managing their debt, and who frankly are frightened of the debt situation in which they find themselves, there are a number of companies who are looking to take advantage of the situation. These companies often charge expensive fees to arrange the debt consolidation loans, which can eliminate a majority of the savings you might otherwise earn through consolidation.
However, debt consolidation is still a legitimate option that has helped thousands of people reduce the monthly debt burden they face. So long as you exercise care in evaluating the pitfalls noted above when considering a debt consolidation loan, it can be a preferable option to bankruptcy. Declaring bankruptcy can seem like a good idea because it can give you a fresh start by potentially eliminating your debt, whereas with debt consolidation you will have to actually pay the debt you owe. But bankruptcy likewise has negative consequences that can follow you for years. Because of the negative consequences of a bankruptcy, you should at a minimum determine what the best monthly payment amount you can arrange is through debt consolidation, to see if that amount is something you can afford to pay.
In the end, it is usually wise to see advice from a bankruptcy attorney to understand the option that is best for your situation.
How can I obtain help from a bankruptcy attorney?
If you complete the short evaluation form below, a bankruptcy attorney can perform an initial evaluation of your situation to help you determine if debt consolidation, bankruptcy, or another option is the best approach for you. This evaluation is free of charge and completely confidential. While this review does not obligate you to anything further, it will give you the opportunity to discuss your situation with a trained professional and hire that attorney to help you through the entire process. So please take the first step today in getting the help you need to resolve your debt.
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