In this article, we’ll discuss some of the situations in which bankruptcy may be the best option as opposed to debt consolidation.
Debt consolidation doesn’t work for everyone and is usually very situation specific. If someone doesn’t have enough income to pay the loan payments in addition to their living expenses, then even if they qualify for a loan they’ll likely end up in the same situation in a short period of time afterwards. Many people need to get a fresh start and put the financial distress behind them. This can be achieved quickly through a Chapter 7 bankruptcy, which wipes all debts except a few non-dischargeable debts like taxes, child support or student loans. Debt consolidation is essentially getting a new larger loan to clear up all existing debt. This now requires you to make a larger payment to one lender. If you find yourself using your paycheck to pay the loan payment and now relying on the credit cards for living expenses such as gas and food you really did not solve the problem. In fact, you may make the problem worse by ending up with a lot more debt than when you started. A fresh start can also be achieved in a Chapter 13 bankruptcy after completion of a repayment plan that pays a smaller portion of un-secured debts and discharges most of the rest. In a Chapter 13 bankruptcy you no longer have interest and late fees so it really begins on a certain date and ends on a certain date.
If creditors are suing or threatening to sue a debtor to obtain a court judgment and begin garnishing wages or bank account funds, a debt consolidation loan will do nothing to stop those lawsuits or collection efforts until the loan goes through and those debts are paid. That can take several weeks or more. Depending on where things are in the process, the debtor may not have time to secure a consolidation loan before the judgment is entered or the garnishing begins. Often when you are at the point where you are being sued by your creditors your credit is not good enough to get a loan large enough to pay the creditors. However, a bankruptcy’s automatic stay requires all creditors to immediately stop collection efforts and court actions until the stay is lifted, the bankruptcy is discharged.
Bankruptcy has many other advantages. These options should be discussed with an experienced bankruptcy lawyer and debt management attorney before deciding on the proper course of action. Your attorney’s experience and familiarity with debt issues can save you a great deal of money, resources and valuable time.
In Massachusetts bankruptcy attorneys Robert Simonian and Anthony Bucacci can assist in identifying a workable and advantageous solution to your debt issues and help you take action towards the right resolution.
It is easy to confuse a debt consolidation loan with a debt management program. A debt management program does not eliminate your many debts. Instead, your single payment is divided among your creditors by the debt management agency, who also takes a portion of your payment. Some programs are ok, especially non-profit and government agency sponsored programs, but many private sector programs are nothing more than scams in which the management firm is the only one who gets paid and debtors often end up in worse shape than before. It is very important to consider what the proposed monthly payment is and if you can actually afford that amount. Be very careful of a company that does not ask that first because they probably do not have your best interest in mind. Many debt management companies are a little deceitful by leading you to believe they are somehow affiliated with a government agency. Often this is not true and people blindly send money to the company only to find out they are doing little or nothing for them except taking your money. Also a lot of debt settlement companies use high pressure sales tactics and do not tell you about the tax consequences of debt settlement and you will end up owing the IRS for the forgiven debts. In bankruptcy there are no tax consequences and you truly get a fresh start. With debt management you may end up not saving any money at all between their fees, the accumulating interest and the tax consequences. If you cannot meet with a person face to face it is probably not a good idea to do business with them.