The Dangers of Debt Consolidation

Memphis Bankruptcy, Social Security Disability & Long Term Disability Attorney

Individuals who may be going through financial difficulties may often feel overwhelmed with large amounts of debt hanging over their head. If you are struggling with debt, payments, repossession, or harassment from creditors you may be considering debt consolidation. 

Although debt consolidation seems like a helpful option, it may end up costing you more money and leave you in debt for a longer period of time. Bankruptcy, on the other hand, may be able to offer you a better solution, extend the length of your pay period and may even result in lower payments. Additionally, bankruptcy may be able to wipe out some of your debts.

An experienced attorney may be able to help you decide what option is best for you and your situation. John Dunlap has worked with many bankruptcy cases and may be able to help you. Call today for a free 30 minute session. 

What is debt consolidation?

Debt consolidation is the process of combining a bunch of debts into one payment. The idea is that all of your unsecured debts, such as credit card debt, student loans, medical bills, etc, are combined into a single payment. Debt settlement companies may buy all of your debt and offer you a lower interest rate. You pay them back on the total of your debt amounts instead of the original debt. 

Typically, debt settlement companies will try and make you think that one payment at a lower interest rate is a good deal. However, this isn’t always the case. Debt consolidation may mean that you make payments over a longer period of time and eventually you may end up paying a lot more. 

Pros and Cons of debt consolidation

If you are stuck in a financial bind, you may be wondering if debt consolidation is a good idea. Although debt consolidation seems like a good idea, companies that offer consolidation may not be completely upfront about how much you will pay. While you do have the option to lump most of your debts into one payment, issues which may arise with debt consolidation include: 

  • Lower interest rates aren’t guaranteed. This means that although debt consolidation offers a lower interest rate in the beginning, the interest rate may change and increase at any time. 
  • You may pay even more money over time. Although interest rates are lower, you may pay more money over time because the payment period is longer. The amount you pay is often higher because of extended payment timelines. 
  • You may be in debt longer. Lower interest rates mean that you may stay in debt even longer because of a longer repayment window. Instead of resolving debts quickly, the time frame can extend to decades.
  • You can still lose your property. Although consolidating unsecured debts may seem to be the best option, if you miss a payment on a secured debt, like a mortgage or car payment, you could lose your property. 
  • Your debt will not be eliminated. Consolidation is a form of restructuring your debts. This means that it will not eliminate the debts that you owe entirely. Only bankruptcy can eliminate debts. 

Debt consolidation vs Bankruptcy

If you are trying to decide what the best option is for your finances, you may be wondering if bankruptcy is better than consolidation. Unlike debt consolidation, there are various options within bankruptcy plans that may offer better solutions. Depending on which bankruptcy plan is best for you, you may have the option to eliminate some of your debts, stop creditors from harassing you, stop repossession, stop wage garnishments, and pay back most or all of your debts over a period of time. 

Once you file for bankruptcy, the automatic stay petition stops creditors from trying to collect on your debts. Additionally, if you file a Chapter 13 bankruptcy, then you will have anywhere between 3-5 years to pay back your debts. The repayment plan is an agreed upon payment plan between you, creditors, and the bankruptcy court. 

The agreement may include how much you can pay, based on income and the amount of debt, and for how long. Some of your debts may be wiped out depending on the bankruptcy court. An attorney may be able to file most of the bankruptcy paperwork on your behalf, eliminating the stress of having to deal with large amounts of paperwork and communicating with creditors.

Don’t fall into the traps of debt consolidation. John Dunlap is an experienced attorney who may be able to help you with your case and provide you with a better solution. Debt consolidation may seem like a smart choice but could leave you wasting both your time and money. Call us today to get a free 30 minute session to discuss your situation.