The Pros And Cons Of Debt Consolidation

Taking out a debt consolidation loan is often seen as a way to rein in heavy debt while protecting credit scores and avoiding bankruptcy, and lenders are happy to encourage this kind of thinking. While making one payment each month instead of many may seem like an attractive option, the realities of the financial sector make it unrealistic for many people facing difficult financial situations. Those who need to borrow the most are often unable to do so, and taking on new debt to escape existing debt can be a risky strategy.

The debt relief attorneys at Ast & Schmidt, P.C., in Morristown have over six decades of combined experience helping New Jersey residents cope with difficult financial situations. We can explain the difference between bankruptcy and other options like debt consolidation during a free initial consultation. Call us today at 973-984-1300 or submit an online contact form to schedule an appointment with one of our lawyers.

Getting Approved For Debt Consolidation Can Be Difficult

Consumers do not generally apply for debt consolidation loans until they have exhausted their other options, which means that their credit reports may already contain late payments and other negative items.

Banks are generally reluctant to provide unsecured personal loans even to those with excellent credit. Individuals who face financial difficulties may find it impossible to get approved for debt consolidation financing that is not secured by real estate or other assets. This greatly increases the risks involved and makes the possible consequences of future financial setbacks far more severe.

Negotiations May Be Challenging

Some debt consolidation companies offer creditors a lump-sum payment if they agree to lower the total debt, but this strategy only works if all of the creditors involved are willing to participate. Lenders may also get cold feet and pull out of debt consolidation deals that linger for too long, or they may only agree to a debt reduction if other creditors are doing likewise.

Bankruptcy is different. If you file for personal bankruptcy, your creditors will have no choice but to participate, and an automatic stay will put an immediate end to collection efforts and creditor harassment.

Beware Of Hidden Fees And Unexpected Tax Bills

Debt consolidators do not work for free, and their clients rarely have the resources to pay upfront application and processing costs. Adding these sums to the amount financed means that interest must also be paid. Consumers who take out this kind of loan may be wise to pay particular attention to the total amount they are borrowing and how that figure was determined. Debt consolidation can also lead to unexpected tax bills as the Internal Revenue Service considers forgiven debt to be a form of income.

Ast & Schmidt, P.C., is a debt relief agency. We help individuals file for bankruptcy relief under the Bankruptcy Code. The information you obtain at this site is not, nor is it intended to be, legal advice. You should consult an attorney for individual advice regarding your own situation.