At Toronjo & Prosser Law, our goal is to help individuals learn as much as they can about bankruptcy so they can make an educated decision about whether to pursue it. Part of that includes learning about potential alternatives to bankruptcy, such as debt consolidation. If you have insurmountable debt and want to know what your options are, you can count on us. We’re here to provide reliable legal counsel so you can make the best decision for yourself and your family.
You may have heard about debt consolidation in the past, but are not sure what its advantages and disadvantages are compared to bankruptcy. Here, we will explore debt consolidation as a possible solution for you.
What Is Debt Consolidation?
Debt consolidation essentially means rolling multiple existing debts into one new one, so you make a single monthly payment to one creditor rather than several. It is accomplished by taking out a new loan, line of credit, or other means to pay off your old debts. The goal is to not only avoid the hassle of having to pay numerous creditors each month but to have a more favorable interest rate and thereby save money. You may also be able to obtain a lower monthly payment than you had previously.
There are multiple ways to consolidate your debts into one:
Personal loan. This may be an option for you if you have good credit because personal loans tend to have lower interest rates than credit cards and other means.
Balance transfer credit card. You may be able to obtain a low or 0% interest credit card for the sole purpose of transferring an old credit card balance that carried a high-interest rate. But be careful, because the introductory interest on this card will likely be temporary. These cards are good choices for individuals who can pay the balance off in a short period of time.
Personal line of credit. This offers similar benefits to a personal loan. However, depending on what you owe on your old debts, you may have trouble securing a line of credit that’s large enough to cover them.
Home equity line of credit (HELOC). Homeowners with sufficient equity in their homes may be able to use a HELOC to pay off multiple debts. The major risk with a HELOC is that you could lose your home if you fail to pay according to the borrowing terms.
What Are The Advantages Of Debt Consolidation?
If you have numerous debts with high-interest monthly payments, here are some reasons to consider debt consolidation as an alternative to bankruptcy:
Multiple payments reduced to one. As mentioned above, people with numerous debts often use consolidation to obtain a single monthly payment. This makes it easier to keep up with your payments, avoid late fees, and responsibly budget.
Lower interest rate and lower monthly payment. You may be able to move multiple payments into one low- or zero-interest payment, potentially saving you significant amounts of money. You could also have a lower monthly payment and save money that way.
Can still access credit. Most people who use debt consolidation can still access credit, which can help in unexpected situations. Conversely, bankruptcy usually causes a credit card company to cancel your account.
Maintain your privacy. Unlike bankruptcy, debt consolidation is not a matter of public record. This protects your privacy and keeps potential employers from finding out about your debt.
What Are The Disadvantages?
There are some reasons that consolidation might not be the best way to handle your debt. For example:
The lower interest rate and payment may not last. If you use, as an example, a balance transfer credit card, the lower interest rate may only be for an introductory period. The same is true for the lower monthly payment.
You might pay more. In exchange for lower interest rates and monthly payments, you may have a longer repayment schedule. This means you’ll pay interest for a longer period of time, likely costing you more in the long run.
You could lose your home. A HELOC could help you pay off your debts, but a major downside is a risk of losing your home if you violate the payment terms.
When You Should Talk To A Lawyer
If you’re finding yourself unable to obtain the loan or credit you need to consolidate your debts, or you simply can’t manage what you owe, it’s time to speak with a lawyer about bankruptcy. There are advantages and disadvantages to bankruptcy itself, but it should be considered in light of other strategies such as debt consolidation.
Every individual’s situation is different. For example, you may not be concerned about the credit score implications of bankruptcy, but may be drawn to its ability to discharge your debts. Bankruptcy therefore may be a viable approach. On the other hand, you may want continued access to credit while you pay down your debts, so consolidation could be a better choice.
Either way, a knowledgeable bankruptcy attorney will review your debt and help you make the best decision that fits your goals. When you’re ready to explore your options, give Toronjo & Prosser Law a call.