Lawyer Helping Los Angeles Clients Find Bankruptcy Alternatives

Advantages and Disadvantages of Debt Consolidation

Debt consolidation can refer to getting a large loan to pay off smaller loans. This only reduces your debt if you get a better interest rate on the larger loan. The term can also refer to working with a credit counseling company that will negotiate lower interest rates or monthly payment on a credit account and make payments on your behalf to your creditors. You may be able to negotiate these items yourself, but this can be difficult for many consumers to do. The primary advantage of debt consolidation is that it is private. Unlike the fact of bankruptcy, which is easily discovered by an interested party, you can keep debt consolidation between your creditor and you. This means it will not affect your ability to get loans or secure a house, or your credit rating. If you get a loan in negotiating debt consolidation, it may show up on your credit report, but it probably won’t lower your credit score.

Another huge advantage of debt consolidation is that you do not have to keep track of payments to multiple creditors at different interest rates. As with Chapter 13 bankruptcy, you make a single payment every month.

Another advantage is that you may be able to keep your credit cards. While credit cards can be detrimental to someone trying to work his or her way out of debt, it is important to maintain these in case of emergency. Appropriate maintenance of a credit card, and never leaving a balance on the card, can help you develop good credit over time.

On the other hand, if you default on a debt consolidation loan, you can lose property that you leveraged as collateral to get the loan. You may stay in debt longer and thereby pay more over a longer period of time because of the interest rates. The lender may also be permitted to take other property it financed in the event you default on a loan, depending on what the loan paperwork says.

Bankruptcy can be a safer choice if you do not want to put your property on the line to get a debt consolidation loan or if your lenders will not negotiate with you. Bankruptcy is a highly structured process with a great deal of oversight. It protects you from creditors and ultimately gives you a fresh start, at least with respect to consumer debt. You may be able to save your home from foreclosure and keep your car from being repossessed.

Not every creditor wants to work with a debt management company. And you may still face lawsuits or harassment in the future by using a debt consolidation loan. None of your debts will be discharged in the future. In sharp contrast, bankruptcy is not optional for your creditors. They must respect the orders of the bankruptcy court. If you follow all the rules, you can get a fresh start.

Consult a Los Angeles Attorney to Help Manage Your Debts