Debt Consolidation vs. Bankruptcy

Debt Consolidation, Circa 1948

Debt consolidation is not the only option – think before you sign!

Debt consolidation is unfortunately an option many bankruptcy clients have exhausted in their search for financial freedom, prior to seeking bankruptcy advice from an experienced bankruptcy attorney, but it shouldn’t be.  Debt consolidation is the combining of all unsecured debt by a company who is paid by the debtor to negotiate with their creditors in order to eliminate debt.  Typically, this boils down to a person taking out one loan to pay off numerous debts.  The process usually requires a person to enter into a contract with a debt consolidation company who then attempts to negotiate a lower payment from their creditors.  At first glance, combining all your debt in this way may seem like a good idea.  When you are struggling, trying to pay off all of your credit cards, and the consolidation company is offering an opportunity to obtain interest rates lower than you would ever be able to obtain from the credit card companies all on your own, it appears as a way out.  However, there are several downsides you should be aware of.

Perhaps the most formidable is the cost.  Most debt consolidation companies require high monthly payments and usually require a starter fee that can be as much as 25% of the total amount a client owes to the credit card companies.  Many times clients seek legal advice after paying the consolidation company several thousand dollars only to see their debt reduced by a small amount.   Most debt consolidation companies will not even work with people with debt less than a certain amount, usually $10,000.

Another downside is it only covers unsecured debts.  For individuals that are having financial difficulty not only with credit cards, but also with their mortgage or car payments, debt consolidation probably won’t offer much relief, and may dig an even deeper financial hole.

In bankruptcy, the automatic stay forbids creditors from trying to collect from debtors while in bankruptcy.  In contrast, a consolidation company has no power to bind the creditors to adhere to any such limitation, and the creditor can go back to harassing you for the debt owed to them at any time.

 

Whatever debt a consolidation company is able to eliminate for an individual is treated as taxable income that must be declared to the IRS.  Debts discharged in bankruptcy, on the other hand, are not treated as income for tax purposes.

If you are facing financial difficulty and are considering using a debt consolidation company, contact me, Attorney Andrea L Siddiqi, the Dayton Bankruptcy Attorney, before you make any decision.  I will be happy to talk to you and share more information on the benefits that bankruptcy can provide.  Call me today, (937)879-9542!