Friday, June 2, 2023

Does Debt and Loan Consolidation Really Work?

Loan and debt consolidation is the process of taking all or some of your debts and putting them all together. Many people use consolidation for a variety of reasons and there are various ways to do it. During the home refinance boom of the mid-2000s, many people refinanced all of their debt into their home loans. The thought was that they could take their high interest loans and put it into loans with very low interest rates. However, many defectors failed to realize that they would be paying off this new consolidated loan for 30 years, and no reduction in the interest rate was going to save them money over that 30 year period. Others use specialized consolidation loans to combine all of their debts into one easily trackable payment. Regardless of the form and nature, the basic premise behind consolidation is that by combining all of your debts into one loan, you should be able to lower your interest rate and make it more “affordable” or “payable”.

In theory, consolidation loans seem like an attractive and viable solution for dealing with debt. However, research and history have shown consolidation rarely works, and my experience as a bankruptcy attorney tells me that in the long run, it doesn’t save people money, but it actually costs them more. You can learn more about why consolidation rarely works by reading 4 Consolidation Traps to Avoid, published by US News & World Report in April 2013.

Even finance gurus like Dave Ramsey admit that consolidation services don’t work and are nothing more than a “steal”. Read The Truth About Consolidating Debt by Dave Ramsey.

There are a handful of reputable consolidation services out there, but many consolidation companies are nothing more than scams, taking advantage of people with serious debt problems by preying on the fear created by debt stress. Many of our former bankruptcy clients have tried consolidation companies and they all reported the same thing, it cost them a lot of money for the service but their debt balance didn’t change or changed significantly.

Instead of wasting your time, money and sanity on consolidation, Congress has provided you with another option to get yourself out of debt. If you are in debt, and you have no foreseeable means of being able to pay it, you may still qualify for help.

From filing for relief under the Bankruptcy Code, people have a variety of options to get their financial lives back on track. Chapter 7 Is a Whole New Beginning By filing bankruptcy under Chapter 7, you can wipe out almost all types of debt and start your financial life with a clean slate. Life is about pressing the restart button.

Chapter 13 works as a structured payment plan, allowing you to pay in a time frame and in an amount you can afford. Chapter 13 has many advantages which are not there in Chapter 7, such as; Preventing interest and penalties on tax debt, saving a home that’s about to be foreclosed on, and in some cases Chapter 13 allows you to remove negative equity in your car. This means you pay what the car is worth and not what the loan balance is.

Also, many people have reported that the time frame for getting your financial life back through bankruptcy is much faster than using unsecured debt and debt consolidation.

Speak with a licensed bankruptcy attorney wherever you live to learn the benefits of settling your debts through bankruptcy.

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