Debt Consolidation vs. Bankruptcy?
Debt consolidation refers to the process of refinancing several debts into one single payment. Some people consider debt consolidation as a chance for a lower overall interest rate and a longer time to pay off the debt.
But does this process actually work? OVERALL, NO – HERE IS WHY!
Consolidating debts in New York could require forming a relationship with a credit counselor. Handling debt consolidation with a debt consolidation program, is usually only effective with high-interest credit card debts. This requires you to reshape your lifestyle with a debt payment plan while the credit counselor negotiates with your creditors and offers you a presumably lower interest rate on outstanding debts. There is no guarantee that this rate would be lower. The rate is set by the creditor, and depends on a variety of issues. Past payment behavior and credit score factor into that rate and, because you’re having debt issues, those variables could be detrimental. While there would be only one monthly payment under this plan, it is a façade for your true debt situation. Additionally, credit counselors are usually only effective when dealing with lower levels of debt. Your one payment could be massive and difficult to sustain on a monthly basis. A consolidation loan is another method for debt consolidation. The lender reimburses your creditors and charges you interest on a new, larger loan. Like the debt consolidation program, there is no guarantee what the interest rate would be, and with a new loan of that magnitude, credit scores would be heavily weighed. If your spending habits are an issue and your personal financial climate is strained, a consolidation loan would not work adequately. A loan would add further stress, despite it being consolidated into one sum. Also, the assumption is that your living style will change and that your financial standing is based upon the payments of that particular loan. In reality, this is an unrealistic expectation.
If you do manage a lower interest rate through debt consolidation, it can prove to be a poor long-term investment in terms of actual dollars. The lender could disguise the loan with a lower rate and smaller payments. For example, if debts are consolidated and the company tells you your payment and interest rate are lower, they could be omitting a major factor: the period of time to repay the loan. If it takes you a longer time, it isn’t a cheaper option—it is a prolonging of debt. With a lengthy loan payment plan, spending habits could worsen and more dollars could be spent repaying it. It presents too great a risk.
As opposed to debt consolidation which almost always fails, in a Chapter 7 Bankruptcy, if successful, you can wipe out certain debt and not have to ever repay it in the future.
While debt consolidation could appear to be beneficial, it often takes advantage of individuals with debt issues. Several factors, such as a scam by your lender, could worsen your situation. It’s important to consider the actual process of debt consolidation and how it ultimately doesn’t work.
Contact our office today to discuss your options at (718) 340-3385.