April 11, 2009
/24-7PressRelease/ -- The Dangers of Debt Consolidation
Article provided by Rosenbaum Law Offices
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As the credit crisis continues and unemployment rates increase nationally, more and more people are falling behind on their mortgages, credit card payments and other household bills. Facing foreclosure and endless calls from creditors, many are left considering their options including debt consolidation and bankruptcy.
Unfortunately, in tough economic times, there are always those who try to profit from the hardships of others. While there are legitimate debt consolidation companies who work with consumers to get debt paid off, this cannot be said for all of them.
Even worse, some of these companies claim they are a better option than bankruptcy for consumers drowning in personal debt, which is patently untrue for the majority of people. With all of the misinformation and confusion concerning debt consolidation, it is important for consumers to fully understand what these companies are, how they work and what they can and cannot do in terms of reducing debt.
What are debt relief companies?
Debt relief or debt consolidation companies offer loans to consumers to repay their creditors. Instead of making several payments per month, consumers only have to make one payment to the debt relief company, who will then forward payments on to the consumers' creditors. Debt consolidation companies generally offer lower interest rates on their loans than consumers may be paying on certain debts, such as credit cards.
In addition to debt consolidation/relief companies, there are also credit counseling services and debt elimination companies.
Credit counseling services help consumers create a budget to pay their bills. They also negotiate with creditors to reduce interest rates. Consumers then make one monthly payment to the credit counseling service, which then pays the creditors.
Debt elimination, or debt settlement, companies have consumers stop making payments to their creditors and instead save the money, either in their own savings accounts or in accounts set up by the debt elimination company. Then, once the account has reached a certain amount, the company will contact creditors and attempt to settle the debt with a lump-sum payment less than the consumer actually owes.
Debt elimination should be considered with extreme caution. Since consumers stop making payments, their credit scores may nosedive and their creditors may pursue legal action to recover the money owed to them.
How do debt relief companies make money?
Debt relief companies make money from the interest rates they charge for their loans and other fees. Debt consolidation companies charge varying amounts of interest on their loans. The repayment period may be stretched out for several years, resulting in a lower monthly payment. But if the loan charges high interest, then the consumer pays more to the debt consolidation company than they ever would have paid to their creditors.
These companies also often charge monthly maintenance fees for their services. In exchange for making only one monthly payment instead of several, the debt consolidation company will charge you anywhere from 10-20% of your monthly payment for using their services. They also may charge a one-time fee in order to enroll in their services. These fees could be several hundred dollars. Oftentimes debt relief companies negotiate payments from your creditors, so in addition to the interest and fees they are collecting from you, they also may be receiving an additional percentage from your creditors.
What are the advantages of bankruptcy over debt consolidation?
You cannot use debt consolidation for every type of debt. This is one of the most misunderstood facts about debt consolidation companies. There are two types of debt: secured debt and unsecured debt.
Secured debt is a debt backed by collateral. This means that something you own can be taken away if you fail to pay the debt. A home mortgage loan is a type of secured debt. If you fail to make payments on your home, the bank will take possession of your house. Car loans are another type of secured debt.
Typically, debt consolidation companies cannot help you renegotiate payments or lower your interest on secured debt. They primarily deal with unsecured debt, or debt that is not backed by collateral, like credit cards.
Debt consolidation companies do not have any authority to make your creditors lower your payments or interest rates. In fact, creditors can refuse to participate in any debt consolidation plan. In contrast, creditors do not have this option once a consumer has filed for bankruptcy protection.
When a consumer files for bankruptcy, an automatic stay is issued against all of the consumer's creditors. This means the creditors must stop all collection actions against the consumer for unpaid debt. This puts a stop to the incessant telephone calls from creditors, stops foreclosure proceedings and ends attempts of repossession. The bankruptcy court then will determine the creditors' rights and whether or not they will be repaid and at what amount.
Debt consolidation actually may make your credit worse instead of better. Debt consolidation companies do not always make your monthly payments on time. When creditors do not receive their payments, they can begin collection actions against you, charge late payment fees and increase your interest rates.
After consumers successfully complete the bankruptcy process, their credit scores improve. While a bankruptcy will stay on your credit report for 7-10 years, it does not prevent consumers from receiving car loans, mortgages and other extensions of credit. Depending on the type of bankruptcy filed, consumers will be able to discharge most of their debts, get a chance to rebuild their credit responsibly and experience a true financial fresh start.
Conclusion
Consumers must be aware that debt consolidation can do little to nothing to help them with mortgage loans, car loans and other types of secured debt. Bankruptcy is a better option with predicable outcomes for those suffering under the weight of debt they cannot repay. The majority of people who begin a debt consolidation plan never complete it. Those who successfully file for bankruptcy, however, are usually able to repair their credit and move forward with their lives.
If you need advice about your right to protection under the U.S. Bankruptcy Code, contact an experienced San Antonio consumer bankruptcy attorney at Rosenbaum Law Offices for a free consultation.
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