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Should I work with a debt consolidation company?

You may have seen their ads on TV or in your social media feeds. Debt consolidation companies often promise to do many of the same things bankruptcy does: help you manage overwhelming debt, simplify your monthly payments, and put you on the road to financial recovery.

This may sound just like the solution you need. But what’s the catch? Is debt consolidation really a good idea?

Why debt consolidation?

Debt consolidation can be a good option in certain circumstances, such as:

  • You have a lot of debt but do not qualify for Chapter 7 bankruptcy.
  • You have non-exempt property that you would otherwise lose during the bankruptcy process.
  • Your debt isn’t dischargeable through bankruptcy (like student loans).
  • Making the commitment to a Chapter 13 repayment plan doesn’t appeal to you.
  • You cannot afford to defend yourself against a creditor lawsuit.
  • Your religious beliefs prohibit bankruptcy or make it non-negotiable for you.

These are just some of the reasons people consider debt consolidation as a debt relief strategy.

How debt consolidation works

In a typical situation, the debt consolidation company will take all of your debt payments and help you turn them into one monthly payment. This happens in one of two ways:

  • Through a loan – You take out a large loan, which the company may provide or help you get. You then use this money to pay back all of your outstanding debt. Then, you only have one monthly payment to pay off this debt consolidation loan.
  • Through debt management – The company negotiates with your creditors and combines all of your payments into one monthly payment. They then use your payments to pay back your creditors on your behalf.

These solutions will extend the length of your overall payment schedule, but in the end your debt is being paid off, right?

Not necessarily. With debt consolidation loans, you may be lured in by the promise of a single monthly payment and lower interest rates, but you end up staying in debt longer. With debt management, your money may only be used to cover the interest on your debt, or even just the fee for the company’s management services – not to actually pay down your principle.

In both cases, you often end up wasting money on services that aren’t actually resolving the root issue.

Why bankruptcy often makes more sense

When it comes to debt consolidation versus bankruptcy, it all becomes a question of loyalty. Debt consolidation companies work for creditors. Their job is to recover as much money as they can for their real clients – the creditors.

By contrast, when you work a bankruptcy lawyer, you have an advocate on your side. Your lawyer only works for you. And if bankruptcy truly isn’t an option for you, he or she can help you find a non-bankruptcy solution that works for you. That could mean working with creditors directly to negotiate a better payment plan, a reduced lump-sum payment, or some other debt settlement strategy.

Your attorney can also offer you better insight into how the bankruptcy process truly works. You may be surprised to learn that in most cases, people can keep their most important assets and still get rid of that mountain of debt in one fell swoop – not through gimmicks or empty promises, but through a fairly simple legal process.

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