BANKRUPTCY VS. DEBT CONSOLIDATION

Bankruptcy succeeds where debt consolidation fails. Many people who seek my advice concerning their bankruptcy options inquire about debt consolidation or private debt management. Many are apprehensive about bankruptcy because someone has convinced them that they should at least try debt consolidation before committing to file a bankruptcy.

Debt consolidation, in most areas, is simply where you hire an attorney or other representative to work or negotiate directly with your creditors. Sometimes debt consolidation can lower your monthly payments. Sometimes debt consolidation can work to reduce the interest rate on a particular debt. In other cases, debt consolidation can reduce the total balance owed to a particular creditor.

Generally, debt consolidation will not apply to a majority of your debts. Mortgage payments, vehicle payments, tax obligations, student loans, payday loans and medical bills are often excluded or rejected from most forms of debt consolidation. Basically, debt consolidation targets credit-based debts, like personal loans, lines of credit and credit cards. And, many people who tried debt consolidation stated it failed because only a handful of the creditors could be included in it, which resulted in little to no relief at all!

The biggest problem with debt consolidation is that the repayment arrangements only work if someone can afford large monthly payments or can commit to the payments for an extended period of time. Frequently, the attorney or debt consolidation agency will arrange for itself to be paid its fee for services before any payments are made to your creditors. Recent observers have noted that many of the debt consolidation agencies now advertising on TV and radio are actually owned and organized by the credit card industry.

A lesser known fact about debt consolidation is that these arrangements are purely voluntary. Creditors can quickly opt out of the program or refuse further payments and then turn the account over to collection agencies. Commonly, they do this without much notice and you start receiving nasty collection calls and letters—the exact things that drive most people into trying debt consolidation! The result is terribly unfortunate: you enroll with a debt consolidation agency, make your payments but then, to your surprise, you continue to receive collection phone calls and letter.

Bankruptcy works because bankruptcy cases are filed and at all times proceed under Court supervision. Bankruptcy cases provide immediate relief upon filing. Chapter 7 cases are normally completed within 90 to 120 days. Chapter 13 cases last between 3 and 5 years. Creditors can not “opt-out” or refuse to acknowledge or abide by the bankruptcy filing. Creditor participation is not voluntary or dictated by the amount or type of the debt involved. Bankruptcies are petitions for relief filed in a Federal bankruptcy court. Once a judge approves the bankruptcy, a court order is issued. This Order is called the discharge order, discussed elsewhere. The discharge is a permanent injunction binding on your creditors from collecting on the debts, forever.

Many people have tried debt consolidation. I am sure that it has been successful for at least some people. However, what I am seeing more and more of lately that is particularly distressing is the increasing number of people who have paid thousands to a debt consolidation agency over several months, or even years, and still end up filing a bankruptcy case. Unfortunately, I have seen many people who have burned through savings accounts and 401(k) plans trying to keep their debt consolidation plan alive. If only more people would have considered bankruptcy as an option much sooner, instead of throwing away hard-earned dollars at debt consolidation.

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