Does debt and credit consolidation really work?

Debt and credit consolidation is the process by which all or some of your debt is taken up and put together. Many people use consolidation for a number of reasons and there are several ways to do it. During the home refinancing boom in the mid-2000s, many people refinanced all their debts into their home loans. The thought was that they could take their high-interest debt and put it into a loan with a much lower interest rate. However, the mistake that many did not realize was that they would pay this newly consolidated debt for 30 years, no reduction in interest rate would save them money in this 30-year period. Others have used specific consolidation loans to consolidate all of their debt into one easy-to-track payment. Regardless of the form and nature, the basic premise behind consolidation is that by consolidating all your debt into one loan, you should be able to lower your interest rate and make it more “affordable” or “payable.”

In theory, debt consolidation seems like an attractive and workable solution for dealing with debt. However, research and history have shown that consolidation rarely works, and my experience as a bankruptcy lawyer tells me that people don’t save money in the long run, but end up costing them more. You can learn more about why consolidation rarely works by reading 4 Consolidation Traps to Avoid published by U.S. News and World Report in April 2013.

Even financial gurus like Dave Ramsey admit that consolidation services don’t work and are nothing more than a “scam.” Read, The Truth About Dave Ramsey’s Debt Consolidation.

There are few reasonably reputable consolidation services, but many consolidation companies are nothing more than scams that take advantage of people with serious debt problems by taking advantage of the anxiety that comes from the stress of debt. Many of our former bankruptcy clients tried consolidation companies and they all reported the same thing, it cost them a lot of money for the service, but the balance of their debt did not change or change significantly.

Instead of wasting your time, money, and sanity consolidating, Congress has provided another option to get out of debt. If you’re in debt and don’t have predictable means to repay them, you can still qualify for help.

By filing for discharge under the Bankruptcy Code, people have a variety of ways to get their financial lives back on track. Chapter 7 is a complete fresh start, by filing for bankruptcy under Chapter 7, you can wipe out almost any type of debt you owe and start with a clean slate for your financial life. It’s life to press the restart button.

Chapter 13 works as a structured payment plan that allows you to repay some debt in a time frame and in an amount you can afford. Chapter 13 has many advantages that Chapter 7 does not have, such as; Stop the interest and penalties for tax debts, save a home that is about to be foreclosed, and in some cases, Chapter 13 allows you to remove negative equity in the car you own. This means that you pay what the car is worth and not what the loan balance is.

Also, many have reported that the timeframe to get your financial life back through bankruptcy is much faster than using unproven debt and credit consolidation.

Talk to a licensed bankruptcy attorney wherever you live to learn the benefits of dealing with your debt through bankruptcy.

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wendy encarnacion

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