An excerpt from Bankruptcy: A New Beginning by Seth Hanson
Many people ask me whether they should try debt consolidation or file bankruptcy. The answer to that question, as with most legal questions, is: it depends.
Debt consolidation refers to taking a loan (secured or unsecured) from a new creditor and using the loan proceeds to pay off other debt. In this manner, someone who uses debt consolidation “consolidates” his or her debt into one loan. If the terms of the new loan are better than the terms of the old loans, then debt consolidation will be better than the prior situation. For example, if the interest rate is lower or the repayment term is longer, then the total monthly amount paid under consolidation could be much lower than the monthly payment with the several creditors. Debt consolidation may also preserve your access to credit and enable you to borrow from additional sources.
However, debt consolidation likely will not address your root problem—you have insufficient income to pay your debts. Similarly, most people who are struggling to make their current debt payments should not use debt consolidation as a tool to take on more debt. Taking on more debt is not a viable solution to the problem of having too much debt. (I wish politicians would understand this basic concept.)
Proponents of debt consolidation point to the simplicity of the arrangement—having one payment instead of many. However, debt consolidation may actually end up costing more money over the long run. Often times the consolidation loan reduces your monthly payment by extending the payback term. So while you are paying a lower monthly amount, overall you are paying back more money because you are paying for a longer period
Debt consolidation is also likely not a long-term solution to the problem. In fact, dozens of people have contacted me several months after they have tried debt consolidation saying they wish they would have filed bankruptcy a long time ago instead of trying debt consolidation. These people ended up filing bankruptcy anyway and could have saved a lot of time and money by filing bankruptcy at the outset.
Whenever I am asked about debt consolidation versus bankruptcy I encourage my clients to make an honest evaluation of whether they can handle paying off the debt, either through consolidation or otherwise, in a reasonable amount of time. If they can pay off the debt in a reasonable time frame, then bankruptcy is not the right option for them. If they won’t be able to pay off the debt, then it makes greater financial sense to file the bankruptcy.
For more information contact your Yuba City bankruptcy attorney.
Categorized in: Debt