The Scam of Debt Consolidation vs. Filing for Bankruptcy

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The Scam of Debt Consolidation vs. Filing for Bankruptcy

Debt does not discriminate.  People from all ethnicities, creeds, genders, financial statuses, and geographical locations find themselves in a financial crisis that renders them incapable of fulfilling their monetary obligations. There are choices for people who find themselves in debt trouble. Some people turn to debt consolidation companies while others make the decision to file for bankruptcy.  In the end, debt consolidation companies are more trouble than the help they promise. Filing for Chapter 7 or Chapter 13 bankruptcy has far more benefits for those struggling with debt.

 

Most of the time, people end up paying more and stay in their debt due to debt consolidation companies.  By definition, debt consolidation is the process of grouping one’s many debts into one debt. For example, if you owe $4000 on 4 different credit cards, debt consolidation would group that $16,000 debt into a single balance. They may also tack on their own fees and attempt to reduce the interest. The consolidation comes in many forms: standard loans, balance transfer offers, Home Equity Loans, student loans and many more. Debt consolidation companies will not reduce your debt, but rather make it easier to pay the debts off in a timely manner.

 

However, these companies end up costing you more money and time in the long run.  Many times, they are companies who prey on those with debt trouble. They claim false non-profit status to lure you in, but do not deliver on what they promise. They will pressure people into plans that are unrealistic.  When you consolidate, there is no guarantee that the interest rate given by the company will be lower than what you already have. And if promised a lower interest rate, many times it is an introductory rate which will increase over time.  Lowering your payments monthly likely means you will be paying off your debt for a longer time. Rather than getting out of your debt trouble, you have extended it. Furthermore, you could end up losing property with debt consolidation. If you use your home or car as collateral for the debt consolidation loan, you can lose that property if you default on payment of your loan.

 

Finally, the debt consolidation companies do not protect you from your creditors suing you. The reason they can sue you and even obtain a money judgement against you is because the debt consolidation company cannot afford you the same protections a bankruptcy filing does. These companies do not pay your debts in a timely way. They put your monthly payment into a reserve account and they usually pay at the end of your term, which could be 3-4 years out. Finally, while you are in the debt consolidation plan, your credit score cannot improve at all because your debts are not showing a 0$ balance and your credit score will remain the same or worsen with time.

 

Filing for Chapter 7 or Chapter 13 bankruptcy is the more beneficial alternative to one’s debt crisis. Essentially Chapter 7 bankruptcy allows you to eliminate many types of debt while Chapter 13 allows you to restructure your debts through a repayment plan. While filing for bankruptcy, you are protected from creditors through an automatic stay.  The automatic stay has the power to stop harassing phone calls, lawsuits, repossessions, and foreclosures. With bankruptcy, you are given a fresh start and eliminate most unsecured debt or through paying back a portion of your unsecured debts through a court-supervised repayment plan.

 

If you are struggling with debt, Khan Law will work with you one-on-one to find the best available solution to your financial problems–whether the answer is bankruptcy or negotiating with creditors or undergoing credit counseling. Contact Alia today for a free 30 minute consultation.

AKhan Team
AKhan Team
Khan Law is a debt relief agency that understands the very prospect of filing for bankruptcy can seem daunting. We sympathize with you and want to relieve your stress, not add to it. We offer professional and personal service in a nonjudgmental environment and aim to help our clients understand their financial problems and exercise their rights under the U.S. Bankruptcy Code.

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