Does Debt and Credit Consolidation Really Work?

Debt and credit consolidation is the process of taking all or some of your debt and putting it together. Many people use consolidation for a number of reasons, and there are different ways to go about it. During the home refinancing boom of the mid-2000s, many people refinanced all of their debt into their home loans. The thought was that they could put their high-interest debt into a loan with a much lower interest rate. However, the mistake many didn’t realize was that they would be paying off this newly consolidated debt for 30 years and no rate cut would save them money over that 30 year period. Others have used special consolidation loans to consolidate all of their debt into one easy-to-track payment. Regardless of the form or type, the basic premise behind consolidation is that you should be able to lower your interest rate and make it “more affordable” or “payable” by consolidating all of your debt into one loan.

In theory, debt consolidation seems like an attractive and viable solution to debt management. However, research and history have shown that consolidation rarely works, and my experience as a bankruptcy attorney tells me that in the long run, it doesn’t save people money, it ultimately costs them more. You can learn more about why consolidation rarely works by reading “4 Consolidation Traps to Avoid” published by US News and World Report in April 2013.

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

There are few reasonably reputable consolidation services out there, but many consolidation companies are nothing more than scams that prey on people with serious debt problems by exploiting the anxiety that comes from debt stress. Many of our former bankruptcy clients have 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 didn’t change or didn’t change significantly.

Instead of wasting your time, money and sanity on consolidation, Congress has provided another option to get out of debt. If you are in debt and have no foreseeable means to pay it back, you may still be eligible for help.

By applying for relief under the Bankruptcy Act, people have a variety of options to get their financial life back on track. Chapter 7 is a complete fresh start, by filing Chapter 7 bankruptcy you can erase almost any type of debt you owe and start your financial life with a clean slate. It’s life pushing the restart button.

Chapter 13 works as a structured payment plan that allows you to pay off 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: stopping interest and penalties on tax debts, saving a home that’s about to be foreclosed on, and in some cases Chapter 13 allows you to take negative equity out of the car you own. That means you pay the value of the car and not the balance.

Also, many have reported that the time frame for recovering your financial life from bankruptcy is much quicker than using unproven debt and credit consolidations.

Speak to a licensed practicing bankruptcy attorney wherever you live to learn the benefits of handling your debt through bankruptcy.