The Problems and Pitfalls of Debt Consolidation

by Matthew Grech | May 8, 2014 | Article |

When it comes to dealing with debt, for many people, debt consolidation seems to be a better choice than filing for Bankruptcy protection. This widely held opinion is due in large part to the marketing machine pushing debt consolidation as a viable option to resolve debt problems, coupled with the numerous misconceptions many people have regarding Bankruptcy.

When compared to a Chapter 13 Bankruptcy, debt consolidation and Bankruptcy share the same goal, namely the opportunity to get rid of one's debt by entering into a repayment plan by paying creditors back some fraction of what is owed. However, the similarities between Chapter 13 Bankruptcy and debt consolidation end there. For example:

Debt consolidation companies usually only have authority to negotiate with a limited number of creditors, which often leaves the Debtor with remaining debts at the conclusion of the process. On the other hand, Chapter 13 Bankruptcy offers a comprehensive and global approach to dealing with all of a person's creditors and debts, which at the conclusion of the Bankruptcy process leaves people debt free and ready to move on with their lives.

Another important difference between Chapter 13 Bankruptcy and debt consolidation revolves around interest payments and late fees. In many cases, when a repayment plan is entered into through a debt consolidation company, interest payments and late fees continue to accrue throughout the duration of the repayment plan. And, as many people already know, it is the interest payments and late fees that make paying one's debts back so difficult. Alternatively, as soon as a Chapter 13 Bankruptcy Petition is filed, interest payments and late fees on most types of unsecured debts immediately cease to accumulate. This also has the added benefit of enabling a person to pay off their debts much sooner.

Next, collection activity such as phone calls, letters and even lawsuits are often time the main reason people choose to contact a debt consolidation company or file for Bankruptcy protection. However, it is through the filing of a Bankruptcy Petition that these collection activities must automatically stop. In other words, a creditor can continue to harass and even sue someone who is paying their debts back through a debt consolidation company. Whereas the Federal Bankruptcy Code mandates that these activities automatically stop immediately upon the filing of a Bankruptcy Petition.

Finally, and perhaps most importantly, filing for Bankruptcy protection offers people a court supervised mechanism through which they can resolve their financial obligations. Further, when filing for Bankruptcy protection most people hire an attorney, whose primary duty is to the client, thus providing the client with an additional source of knowledge and security. On the other hand, debt consolidation companies are third-party, for-profit businesses whose primary goal is to make money by charging a fee or percentage of that which is paid to a creditor.

As one can see, attempting to resolve one's financial problems through the use of a debt consolidation company comes with a number of problems and pitfalls.

To further explore what Bankruptcy can offer you, please call Grech Legal at 650-549-7728 for a free debt consultation.