Debt consolidation may sound like a great idea. Especially when the debt load just seems insurmountable because there are too many different accounts to remember to pay the minimum payments every month. The problem is that many debt consolidation programs have serious drawbacks. Bankruptcy is often a much better decision in the long-term. The following is a discussion of the various issues to take into consideration before making what could be a fateful decision to consolidate debt.
Will debt consolidation reduce monthly payments enough to solve the problem?
Budgeting is an important skill and habit, but everyone knows that it is much easier said than done. For most folks these days, by the time rent is paid and food is put on the table, there isn’t much left to go around. Especially to pay old credit card bills or medical bills.
Creditors certainly don’t care about individual consumers’ budgets. At first glance, consolidating debt into one single payment seems like a good idea, but oftentimes the payment isn’t actually any less than it would be broken up into separate payments. And sometimes the debtor may even end up paying more over the long run. So, if the debt consolidation leaves the budget in the same or worse condition, is it really worth it?
How much does consolidation cost?
There are a wide variety of debt consolidation companies out there. It is almost impossible to tell which, if any, are actually a good deal. There are often hidden fees or additional costs that aren’t very apparent at the beginning. If payments are late or the payment plan doesn’t work after a few months, what happens? Many times there are penalties, which can cost money that should be going towards food for the kids. In addition, interest and fees are likely still going to accrue.
Is debt consolidation really that much better on a credit report than bankruptcy?
Debt consolidation plans do not necessarily help a credit score as much as the companies would like the consumers to believe. In fact, there is no evidence that it will help at all. Those debts will likely still be reported as late and the credit score will plummet accordingly.
Why is bankruptcy better than debt consolidation?
The reasons are many. Bankruptcy will immediately stop debt collection calls and will protect the consumer from car repossessions, bank levies, and wage garnishments. Plus, a Chapter 7 bankruptcy typically would be completed in four to six months, instead of years to pay off a debt consolidation program. All that money that would go towards old credit cards could immediately start going to paying for health insurance, diapers, food, gas, new tires or whatever life expenses are around the corner.
Debt consolidation is usually not a great solution. Many folks try it and then end up filing bankruptcy anyway. By that point they have thrown away thousands of dollars and wasted valuable time. Life is short. Don’t get bogged down in an endless cycle of making only the minimum payments. A bankruptcy attorney in Sacramento, CA can help explain how the process works.