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Considering A Debt Consolidation Loan or Debt Settlement Company? Bankruptcy May Still Be Your Best Option

Jan. 19, 2024

If your life is starting to feel like the words from an old country song: “Another day older and deeper in debt,” maybe it’s time to consider your options for financial relief. When you can’t pay the principal on your debt, it may feel like you can never get out of debt and may put you at risk of losing your business or other assets. Taking out a debt consolidation loan or working with a debt settlement company may look like a good option, but neither is risk-free, and some debt consolidation companies are just scammers.

If you or your business can’t afford a payment that pays down the principal balance, bankruptcy might be the best option.

Still, suppose you are considering debt consolidation or a debt settlement company. In that case, it’s helpful to understand the differences between the two, their pros and cons, and how they compare to bankruptcy.

A debt consolidation loan means taking out one large loan to pay off lots of smaller loans. Debt settlement companies boast that they can negotiate lower debt payments. These options may sound good, at least in theory, but they don’t always work out all that well in practice.

Sure, there are circumstances in which debt consolidation or using a debt settlement company might actually be the best choice. Suppose your debt level isn’t that high. In that case, debt consolidation may be worth considering if you have a good credit score and can get a better interest rate on one consolidated loan than you currently have on multiple loans or credit cards. But know what you are getting into before taking that route. Bankruptcy may still be your best option.

The Upside Of Debt Consolidation Loans

Some lenders offer lower interest rates for debt consolidation loans than you may currently pay, which can lower the monthly payment and reduce the number of payments you make each month. If you consistently pay your debts on time, you should eventually get out of debt. However, you may be paying the loan off for a longer term. That means you might pay more in the long run.

The Downside Of Debt Consolidation Loans

Taking out a debt consolidation loan isn’t always enough to get you back on your feet. That can be for a variety of reasons, which we explain below. We have had clients who have taken out consolidation loans and still ended up needing to file for bankruptcy.

Beware Of Fly-By-Night Debt Settlement Companies

Some companies that advertise that they will consolidate your debt are actually debt settlement companies with high up-front fees and other hidden fees to settle your debt with creditors. They are for-profit companies that often prey on unsuspecting consumers desperate for help. Not all creditors will even negotiate with them. Some of these companies promise a lot but don’t even pay off the creditors they are supposed to pay. That can make your financial position even worse. Clients often tell us that the debt settlement company they gave their hard-earned money to never contacted all their creditors. If that happens, you can be exposed to collection and no resolution.

When Bankruptcy Is A Better Option

Bankruptcy might be better than debt consolidation when an individual or business faces insurmountable debt they cannot realistically repay. Here are some situations where bankruptcy could be preferable:

Your debt load is too high. If your debt load is too high, you still might not be able to make the loan payments even after consolidation. Many factors can increase the interest on the loan and make the payment too high for your income level. If that’s the case, bankruptcy might offer a more realistic path toward resolving the financial crisis.

Your income is too low. If you don’t make much money and may not for the foreseeable future, you may still struggle to make the payments and need to file for bankruptcy anyway. You will have lost time and money while making payments under the consolidation loan. You could even face garnishment of funds. In bankruptcy, you would have had the protection of the automatic stay, which means creditors are stayed from collection activity such as garnishing bank accounts or assets.

Not all of your debt can be consolidated. That’s critical to understand! Debt consolidation typically doesn’t affect secured debts such as mortgages or car loans. If you are behind on paying secured debts, bankruptcy might offer a way to restructure them or, in some cases, strip away certain secured claims, such as merchant cash advances. Other types of debts that usually cannot be consolidated include student loans, tax debts, legal judgments, and certain types of unsecured debt.

You may get burned by shady debt consolidation or debt settlement companies. If a debt consolidation loan offer sounds too good to be true, it probably is. According to the Consumer Financial Protection Bureau (CFPB), “Many of the low-interest rates for debt consolidation loans may be ‘teaser rates’ that only last for a certain time. After that, your lender may increase the rate you have to pay.”

Debt consolidation does not offer the legal protection of bankruptcy. Once you file for bankruptcy, an automatic stay is in effect, which means all collection efforts, repossessions, and lawsuits are stopped. Debt consolidation does not offer this legal remedy.

You may be able to protect some of your assets. Depending on the type of bankruptcy filed, you may be able to keep some of your assets rather than having them repossessed or liquidated.

You may be able to reorganize your business. Chapter 11, Subchapter V, has been a very successful tool in assisting small businesses in restructuring. Almost all of the cases that we have filed under Subchapter V resulted in a very small percentage paid to creditors. That relief can make it possible to keep your business’s doors open and employees paid.

You may be able to rebuild your credit more rapidly after a bankruptcy. This may sound counterintuitive since both bankruptcy and debt consolidation can negatively impact your credit score. However, if you already have a low credit score, bankruptcy might improve your credit score by reducing your debt-to-income ratio. Also, the debt discharge may help you get in a better financial position more quickly.

There may be tax advantages to bankruptcy when compared to debt consolidation. From a tax standpoint, debt canceled through bankruptcy is usually not seen as taxable income, but canceled debt from consolidation or a debt settlement might be.

Bankruptcy may be cheaper than a debt consolidation loan in the long run. Interest and fees on a consolidation loan might make it an expensive option compared to the legal fees and court costs of bankruptcy, especially if the bankruptcy results in the discharge of a large amount of debt. Additionally, debt consolidation loans often have an extended payment term. That may lower the total amount you spend each month on debt payments, but you could pay much more in the long run due to interest rates and fees and a longer repayment time. If your credit score is low, your interest rates may be high, even for a consolidation loan. That means your costs may be unacceptably high if you can’t pay off the debt ahead of schedule.

BransonLaw Can Help

In some cases, debt consolidation may be a good option for you. But don’t go into it blind. Understand the benefits and risks. Depending on your circumstances, bankruptcy may be the best option for helping you reduce or eliminate your debt and get you or your business back on sound financial footing. At BransonLaw, we can assess your financial situation and help you decide whether bankruptcy makes sense for you. Call us today if you are considering bankruptcy. Our team of experienced bankruptcy attorneys is here to guide you through the bankruptcy process and help you get back on your feet.

We are located in Orlando, Florida, and handle bankruptcy cases around the State of Florida. If you live or operate a business in Florida and are unable to manage your debt, call us today. Our goal is to help you understand your options.