Bankruptcy Alternatives – Debt Consolidation Loans
Filing for bankruptcy is not the best solution for everyone who’s struggling with debt.
But those who don’t think bankruptcy is the right choice for them have a variety of options available.
Taking out a debt consolidation loan is one such option, but you may want to talk with a bankruptcy lawyer in your area before you make such a big decision.
Fill out the form below to connect with a sponsoring bankruptcy lawyer today for free.
What is a Debt Consolidation Loan?
A debt consolidation loan is a loan that combines (or consolidates) your other financial obligations.
In many cases, debt consolidation loans take the form of second mortgages on a house.
Essentially, if you take out a debt consolidation loan, you’re borrowing money to pay off your debts and then paying back that borrowed money.
The Pros and Cons of Debt Consolidation Loans
Although debt consolidation may benefit your financial situation, taking out one loan to pay off others doesn’t work for everyone.
In order to determine whether or not a debt consolidation would work with your finances, you need to understand the positive and negative aspects of this particular financial strategy.
The Pros of Debt Consolidation
- Fewer bills to pay. If you’re overwhelmed by paying many bills each month, a debt consolidation loan may give you peace of mind. You’ll only make one payment – for the debt consolidation loan – and you don’t have to worry about losing track of stacks of paper.
- Lower interest rates. In some cases, the interest rate on your debt consolidation loan will be lower than the rates on your original debts. Credit cards, for example, often come with steep interest rates that can significantly increase the amount of money you pay over time.
- Discounts are possible. Some lenders will offer you a break on your consolidation loan, especially if you’re considering filing for bankruptcy. This could save you money in the long run, but be careful. Debt consolidation has downsides, as well.
The Cons of Debt Consolidation
- Unsecured loans secured. If you take out a debt consolidation loan in the form of a second mortgage, you’re essentially agreeing that, if you can’t make payments, your lender can foreclose on your house. That’s usually not a good deal for you, especially if most of your debt is unsecured (not linked to any property), like credit card debt or medical bills. If you cannot make payments on unsecured debt, you may receive a discharge (that is, forgiveness) from the bankruptcy court.
- Larger overall payment. In some cases, lower interest rates may mean more manageable payments in the short term, but often come with loans that last a long time. Over the life of your debt consolidation loan, you could end up paying more than you would have under the terms of your original debts. Of course, if you cannot afford your current monthly payments, this may not bother you too much.
- High costs and fees. Some unscrupulous lenders may offer you a loan with a manageable interest rate but add astronomical fees and charges to your account. This could end up costing you more than you can afford and more than you would have paid originally. It’s important to do your homework and shop around before committing to a loan.
- Tight credit market. During the housing boom a few years ago, second mortgages were easy to come by. Today, though, you may have trouble getting a second mortgage on your home – even if your credit is relatively strong. For this reason, finding a lender to offer you attractive terms may be more trouble than it’s worth.
Learn More from a Bankruptcy Lawyer
Even if you’re fairly certain that bankruptcy isn’t the best way to deal with your financial situation, a bankruptcy lawyer may be able to offer you the kind of insight into your situation you may need to make a decision.
If you’d like to speak with a bankruptcy lawyer practicing near you, all you have to do is fill out our free online case evaluation form or call us at 866-288-7281 and we’ll connect you with a sponsoring bankruptcy attorney in your area.
To get an idea of what your other non-bankruptcy debt management
options are, you can take a look at some of Bankruptcy Central’s other
pages: