Bankruptcy

Debt Consolidation Loans ? Are they better than bankruptcy?

By Howard Hayes

When considering your options to deal with the debts you have, many people will first explore the idea of a debt consolidation loan.

A debt consolidation loan is a loan that a financial institution will give you that allows you to group together other debts by paying them off with the loan.  For example, if you have three different debts that total $15,000 a loan company may give you a loan for $15,000 and you would use the loan to pay off the three debts with.  You?re replacing three old debts with one new debt.

Debt consolidation loans have some advantages:

• Because you now only have one payment to make, it should be easier to budget
• If the interest rate on your loan is lower than the interest rates on your credit cards, then it should save you money in interest payments
• By combining three interest rates into one, your overall monthly payment could be lower 

However, they also have some disadvantages:

• A debt consolidation loans are becoming increasingly difficult to obtain.
• You may need a co-signor. If you do, you?re now bringing someone else into the responsibility of your debt problems
• You may need to put something up as security such as your house. If consolidating debts through a second mortgage, your house will now be at risk if you don?t keep up with the payments
• The lender will want to see you have a steady income, employment and a good credit rating before considering whether or not to qualify you for the loan.
• Some financial institutions may qualify you for a loan, but at a high rate of interest.
• Debt consolidation loans require discipline. If you qualify for the loan and then you continue to incur new debts again on the credit cards, you?re essentially increasing your debt load leading to further problems.
• Your credit score will drop. Instead of having three accounts with a good payment history, you now only have one.

Sometimes debt consolidation loans won?t work for you. 

Howard Hayes - Client Services

Don?t forget, a lenders primary motivation for wanting to qualify you for a debt consolidation loan is because they believe they can money from you.

If the debt load you have is just too overwhelming and the monthly payments on a debt consolidation loan will be too high or you simply don?t qualify then you?ll need to start looking at other options.  Bankruptcy is an option, but it may not be the only other answer.

The advantages of filing a bankruptcy would be that you?d be clearing yourself of all the debts as opposed to re-financing them.  You don?t need to qualify to file for bankruptcy; it?s a choice you make.  It?s the quickest and cheapest way to clear yourself of debt problems and it legally protects you when accounts get behind and you face collection problems and the threats of legal action against you.

Many people will search for help in consolidating debts as a way to avoid filing bankruptcy and often fall into the trap of committing to a higher interest rate debt consolidation loan because the only financial institutions that will qualify you will typically charge you a higher rate of interest for doing so.  The fear of bankruptcy and the fear of losing assets will often lead people to the clutches of lenders that care more for their profits than they do about you as a customer.

The good news is that there is another way.  Consumer Proposals are becoming more and more the number one alternative to bankruptcy and the number one way to consolidate debts.

A Consumer Proposal is a legally binding settlement of debts.  Proposals can be filed with the help of a trustee.  It allows you to offer payment terms to the people that you owe money to that you can realistically afford.  You?re allowed a maximum of five years in which to complete a proposal and there is no interest charged on what you repay.   In the same way a debt consolidation loan groups all your debts into one payment, a Consumer Proposal does too except this time, instead of paying the principal debts plus interest, you?re only paying back what you offer to pay back.

Sounds too good to be true? Well consider the position of the people you owe money too.  If you don?t qualify for a debt consolidation loan, and as much as you may want to still avoid a bankruptcy, they want to avoid it too.  They?d rather accept a Consumer Proposal that is offered on the premise that they?d rather get something back that nothing.

Finding ways to solve a debt problem is never easy.  Here at Hoyes Michalos & Associates Inc we recognize that no two people?s debts problems are exactly the same and therefore the best solutions for a debt problem will depend entirely on your specific circumstances.   As such, we always recommend that you contact us right away and speak to one of our professionals about your situation and we?ll go over all the options you have.  Whether you just want to talk on the phone or book an appointment to come in to one of our offices for a chat, it?s a free service we offer and there?s no obligation.  Contact us by email or call today at 310-PLAN and let?s get started.

Full post as published by Hoyes Michalos and Associates Ontario Personal Bankruptcy Blog on March 07, 2011 (boomark / email).