Debt and loan consolidation is the process of taking all or part of your debt and putting it all together. Many people use consolidation for a number of reasons and there are various ways to do it. During the home refinancing boom in the mid-2000s, many people refinanced all of their debt into their home loan. The idea is that they can take the high-interest debt and put it into a loan with a much lower interest rate. However, the drawback that many people don’t realize is that they will pay off their newly consolidated debt over 30 years, no interest rate cuts will save their money over that 30 year period. Others have used a special consolidation loan to pool all their debts into one easy-to-trace payment. Regardless of its form and nature, the basic premise behind consolidation is that by combining all of your debts into one loan, you should be able to reduce your interest rate and make it more “affordable” or “payable”.
In theory, consolidating debt seems like an attractive and viable solution to 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, people don’t save money but in fact it ends up costing more. You can learn more about why consolidation rarely works by reading the 4 Consolidation Pitfalls to Avoid published by US News and World Report in April 2013.
Even finance gurus like Dave Ramsey admit that consolidation services don’t work and are nothing more than “cons.” Read, The Truth About Debt Consolidation by Dave Ramsey.
There are some consolidation services that are somewhat reputable, but many consolidation companies are nothing more than scams that take advantage of people with serious debt problems by preying on the fear that stems from debt stress. Many of our former bankruptcy clients have tried consolidation companies and they all reported the same thing, they spent a lot of money on the service but their debt balance did not change or did not change significantly.
Instead of wasting your time, money, and sanity on consolidation, Congress has provided another option for getting yourself out of debt. If you are in debt, and you have no predictable way of paying it off, you may still be eligible for assistance.
By applying for waivers under the Bankruptcy Code, people have various options to get their financial life back on track. Chapter 7 is a whole new start, by filing for Bankruptcy under Chapter 7, you can erase almost any type of debt you may have and start your financial life off to a clean start. It’s live pressing the restart button.
Chapter 13 serves as a structured repayment plan, allowing you to pay back a certain amount of debt within a timeframe and in an amount that you can afford. Chapter 13, has many advantages that Chapter 7 does not have, such as; stop interest and tax debt penalties, save foreclosed homes, and in some cases Chapter 13 allows you to write off negative equity in the cars you own. This means you pay what the car is worth and not what the loan balance is.
Also, many report that the time frame for getting your financial life back through bankruptcy is much quicker than using debt consolidation & unproven loans.
Talk to a licensed practice bankruptcy attorney wherever you live to learn about the benefits of dealing with your debt through bankruptcy.