Eliminating calls from creditors, reducing finance charges, lowering interest rates, and only having one debt payment to worry about each month sounds wonderful to someone who is struggling to pay his or her debts. That is exactly what debt consolidation companies promise clients. Debt consolidation companies promise to cut years off your debt payments, help reorganize your debt, alleviate your stress and anxiety, and improve your financial situation.
Most debt consolidation companies offer additional services in order to “help” clients improve their finances. They promise clients access to credit counseling, free educational resources, 24-hour access to your accounts online or by telephone, money management tools, and access to online support groups to help you as you overcome your debt problems. However, there are several things that debt consolidation companies do not tell you when they are giving their “sales pitch.”
Making one monthly payment to debt consolidation companies is no better, and sometimes worse, than making the monthly payments to individual creditors. In the long run you may actually be paying more money than you owe right now to your creditors. While debt consolidation companies may be successful in reducing the monthly payments you must pay to your creditors, the length of time it takes to pay the debt in full is much longer. This means you will pay much more in interest over the long run.
The services offered by debt consolidation companies can be expensive. A substantial portion of your “monthly payment” is going to the debt consolidation company. Your creditors only receive a small portion of that payment which lengthens the time it takes to pay off the debt and costs you more money than if you would have negotiated with your creditors yourself.
Even though your creditors may agree to accept lower payments, lower your interest rate, or stop charging late fees, a creditor can decide at any time to file a lawsuit to collect the full debt. You could pay on the debt for years and still face a collection lawsuit.
Some debt consolidation companies claim they can settle your debts for pennies on the dollar. In order to do this, you must have sufficient funds available to make lump sum payments to your creditors. In most cases, these lump sum payments are at least 60 to 70 percent of the total amount owed if not more. In addition, you are being charged fees by debt consolidation companies for this service so you may be paying the same amount, or more, than you currently owe on the debts. Also, if you settle a debt, the creditor will file a 1099 tax form with the IRS at the end of the year requiring you to claim the forgiven portion of the debt as income on your tax returns.
Debt consolidation companies cannot give you a fresh start with a clean slate. These companies cannot resolve your debt problem in a way that gives you the debt relief you need without overwhelming debt hanging over your head for years. A bankruptcy filing gives you the fresh start you need by eliminating most, if not all, of your debts. Your creditors cannot “opt out” of your bankruptcy. If you do not have the money to pay your creditors each month, a bankruptcy filing resolves this problem by wiping out your debt so that you can concentrate on your future instead of being burdened with the debt for years.
Bankruptcy also stops credit harassment, collection efforts, repossession, foreclosure, wage garnishments, and levies. Debt collection companies cannot guarantee that creditors will stop collection efforts. The automatic stay provisions of the Bankruptcy Code prohibit creditors from contacting you with regard to the debt or taking any collection action after the bankruptcy case is filed.
The fees for filing a bankruptcy are much lower when you compare them to the fees you will pay debt consolidation companies. If you file a Chapter 7 case, your bankruptcy will be complete in four to six months rather than years. Even if you file a Chapter 13 case, you know that you will complete the case within three to five years while debt consolidation plans typically take much longer depending on the amount of debt you owe. Last, if you do file a Chapter 13 case, you will probably pay a very small percentage of your unsecured debt and, at the end of your case, the remaining unsecured debt is discharged without any tax consequences.
If you would like to learn more about debt consolidation, download our Truth About Debt Consolidation eBook.