Debt consolidation may seem like at great idea, especially for those debts that you just can’t seem to get rid of. However, many debt consolidation programs have serious drawbacks. You should take these factors into consideration before deciding how to tackle your debt.
1. How much will debt consolidation cost?
Ask if the consolidation program has additional fees or other hidden costs. Before signing up, make sure you know exactly what you are getting into. For example, what will happen if you make a late payment or can no longer afford to make your payments? More often than not, your creditors can continue to charge debt against you, even when you are making your best efforts to make your payments on time. There are very few “legal” protections associated with debt consolidation plans.
2. Will debt consolidation meaningfully reduce your monthly payments?
Creditors, such as they are, do not care if you will be able to pay for this month’s rent or groceries. It is true that debt consolidation can offer some minor relief by bundling all of your unsecured debts into one monthly payment. However, your payments might not actually be any less than before! Basically, you might find yourself back at square one. This is one benefit of Bankruptcy over consolidation: bankruptcy cuts the collection agencies out of the equation, allowing you to focus on getting back on your feet.
3. Will debt consolidation be any better on your credit than bankruptcy?
Worried about your credit? Debt consolidation will still bring down your credit score. Plus, you will then face the challenge of trying to rebuild good credit while juggling to pay back your existing debt. Unlike bankruptcy, debt consolidation will not protect you from car repossessions, bank levies, or wage garnishments. If debt collection is impacting your daily life, consolidation may not be enough.
You should also be aware that many people who choose debt consolidation still end up taking out additional loans or credit cards. This will have a negative effect on your credit score.
Don’t get caught in an endless cycle of only making the minimum payments. If you want to get your fresh start or have questions about bankruptcy as a debt-relief option, call my office at (916) 333-2222.