The Benefits and Downfalls of Debt Consolidation
Understanding the Options for a Fresh Start
Debt consolidation is one option for those who are struggling with debt. The process lumps all of the debt a person owes together, and the debtor then pays a single monthly payment. In theory, it’s very similar to the debt restructuring that takes place in a Chapter 13 bankruptcy in Gilbert. However, the process is very different, depending on what option you choose.
Understanding your options for debt consolidation, as well as the advantages and drawbacks of each, can help you better make the right choice for your finances.
Types of Debt Consolidation
Not all debt consolidation is referred to as “debt consolidation.” For example, one of the most common types of debt consolidation that people use is the credit card balance transfer. A person might transfer several smaller balances onto one credit that has a higher limit. Then they pay a monthly payment to one credit card instead of several, thereby reducing the interest they owe.
Other types of debt consolidation include:
- A home equity loan
- A personal loan
- A loan designed specifically for debt consolidation
- Chapter 13 bankrupty
Home equity loans are often advertised for the purposes of consolidating debt, and personal loans can be used for any purpose you choose. Banks offer debt consolidation loans for those looking to pay off debts, and they look at the debts you owe, as well as other financial circumstances, when deciding whether to award them.
Under a Chapter 13 bankruptcy plan, a bankruptcy trustee analyzes your debts and determines what you are able to pay. You are then ordered to pay one monthly payment to the trustee for a period of three to five years. At the end of that time, your remaining debt may be discharged.
Benefits of Debt Consolidation Plans
The primary benefit of debt consolidation plans, when they are selected and implemented properly, is that they reduce the amount the borrower owes by reducing the interest paid. Usually, the debt consolidation vehicle is chosen for its lower interest rate – such as the credit card that offers a 0 percent rate on transferred balances.
Another benefit of these plans is that the debtor can pay only one payment each month. Even if the amount doesn’t change, the mental relief of focusing on just one payment can be great.
The benefits of a Gilbert Chapter 13 bankruptcy – the most efficient debt consolidation plan of all – is that the creditors have no say in what is paid, and the borrower is not at the mercy of yet another lender. The courts decide what the borrower can pay and sets the terms. An affordable plan is set in place, giving the borrower real breathing room again.
Disadvantages of Debt Consolidation Plans
The biggest disadvantage of a debt consolidation plan initiated by the borrower – such as a credit card balance transfer or a bank loan – is that if the person does not curb their spending habits, the debt will only compound. The person will now owe on the debt consolidation vehicle plus whatever new balances they have run up.
Another disadvantage is that the debt consolidation plan may not actually solve their debt problem. They may miss payments to the loan or the new credit card, incurring new interest and penalties, and continuing to struggle.
A Chapter 13 bankruptcy filing does not come with these disadvantages. Because the debt is included in the bankruptcy repayment plan, the credit cards or other accounts cannot continue to be used. New debt cannot be added. In addition, the repayment plan is based on the person’s ability to pay, so there should be no struggle to keep to the terms of the plan unless change occur, such as the loss of a job or a medical stay.
If you are struggling with debt, we encourage you to call Gilbert Bankruptcy Lawyers to learn more about the debt relief you can achieve through bankruptcy. We may be able to help you get on a debt restructuring plan through Chapter 13 bankruptcy, or we may be able to help you have your debts discharged through a Chapter 7 bankruptcy. A bankruptcy attorney from our team will review your finances and discuss your goals and recommend the best course of action for you. Contact Gilbert Bankruptcy Lawyers today to meet with an experienced bankruptcy lawyer and learn more about your options.