Debt consolidation is the process of combining multiple debts into one single debt. There are many different debt consolidation companies, lenders and methods. The consolidation can be done with a new loan/ refinancing/ balance transfer; or by the debtor making monthly payments to a debt consolidation company for the company to then disburse to the creditors. Although we will talk about debt consolidation during your free initial consultation as one of many options for debt relief, the following are some considerations that should be made before pursuing debt consolidation:
1. Do your homework/ research on the company you are considering. Be aware there are a lot of scammers out there. Check how long the company has been in business. Check the company’s reviews and reputation using several different online sources and websites (such as google, better business bureau, social media etc.). Make sure you understand what their process is for paying your creditors. If their process doesn’t make sense to you, you might be dealing with a less than honest company. Remember, there is a lot of fraud out there. If you are unable to find a trustworthy company, we can recommend certain reputable local lenders/ debt consolidation companies during your consultation.
2. What are your monthly payments going to be? Once you know the payment amount, you will need to consider whether your income and expenses are such that the payment is affordable and feasible. Keep in mind that you need to be able to maintain your normal expenses in addition to the consolidation payment. You should also be saving for retirement and emergencies. If the payment is not realistic or affordable, you might need to consider another option such as debt settlement, Chapter 7 Bankruptcy, and/ or Chapter 13 Bankruptcy. In my experience, I usually see clients with very high, unmanageable debt consolidation payments. I believe it is because the payment is usually based on paying off your creditors in full (or what they would be willing to accept) regardless of your income/ expenses/ affordability. In the alternative, Bankruptcy is based on what your budget allows. For example, in a Chapter 13, assuming there are no other issues (such as liquidation analysis issues which I will not go into here), if your budget shows you only have $50.00 left over every month after your normal expenses, that will be your monthly Chapter 13 plan payment whether that amount pays 1% or 100% to your creditors. If you otherwise qualify, Chapter 7 does not usually require a payment to the creditors.
3. What are the company’s fees? Very often I see clients who have been making very high debt consolidation payments for a long time only to find out the payments have only been going to/ paying the consolidation company’s fees. Review the fine print of any contracts or agreements very closely for any and all fees, particularly any hidden fees. Be sure to check the interest rate. In the case of refinancing, carefully review any closing costs.
4. What creditors are included? Not all creditors are always included in a debt consolidation. For example, judgments, finance companies, payday lenders and student loans are not usually included in debt consolidation. Many consolidation companies are also not able to work with any secured debts such as title loan companies, car loans, home loans, or taxes. If you need help catching up a secured loan, a Chapter 13 reorganization might be your best option. On a related note, debt consolidation does not stop lawsuits and judgments. I often see clients who have been making high payments to a consolidation company for months only to find out they are still getting sued.
5. What is the impact on your credit going to be? Although the impact on your credit from debt consolidation might be better than a Bankruptcy, it is likely a still bad mark on the credit; and you need to carefully weigh the pros and cons, including the impact on your credit.
6. If you are taking out a new loan or refinancing to pay off your debts, are you required to secure the loan with collateral? If so, you might be taking equity out of your most important asset (such as your house) that might be otherwise exempt (protected) and/ or vital for your retirement plan/ financial stability to pay otherwise low-priority/ unsecured creditors. You should consult with an attorney before taking out a second mortgage or refinancing your home. On a related note, you should also consult an attorney about who you repay as some payments to creditors could be reversible if you continue to experience financial issues and ultimately need to file Bankruptcy sometime in the future. In that case, the money paid out would have been wasted while you are left in a worse situation with no equity in your home and/ or un-affordable mortgage payments.
7. Do you qualify? Whether you qualify for refinancing or debt consolidation depends on your income, credit score and debt amount. If you are unable to qualify, you may need to consider another option such as Bankruptcy or debt settlement which we can discuss further with you. Even if you qualify, is it still the best option for you? Is the company paying the creditors in full when the debts can/ should be settled? You might be able to save a substantial amount of money through debt settlement which we would discuss with you at length.
8. Is it going to work or best for me in the long term? Similar to above, even if you qualify for debt consolidation or a new loan/ refinancing, you need to consider if it is going to really keep you out of debt forever. Many times, especially when it comes to balance transfers, it might just be a temporary fix to a much bigger problem; and does not provide a long-term, sustainable solution to your financial problems. If it is not going to give you true relief, we need to talk about more viable, realistic options. You should not feel trapped in a payment/ situation that is stressful and unmanageable; there might be better options for a true fresh start.
In our free consultation, we will review your history, where you are financially and talk about your options. Our goals are to help you out of debt, give you advice and tools to stay out of debt for the long-term; and give you a vision of a successful financial future which we define as debt free, owning your own home, money in the bank and ready to retire.
Again, debt consolidation/ refinancing are some of the many tools and options we will discuss with you to help you find a solution to your financial problems. We will discuss the pros and cons at great length. If you have any questions about debt consolidation or debt relief, please set up a time to discuss with one of our attorneys.
Contact our office if you have any questions. Consultations are free.