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Consolidate or Declare?

Debt management is in the forefront of many peoples’ these days, and along with the decision of consolidation versus declaration of bankruptcy. In order to make an informed decision a basic explanation of the debt consolidation management practice follows.

Debt consolidation involves rolling all of your debts together into one and having only one payment to make regularly. It usually involves obtaining a secured or unsecured loan. There are several advantages associated with this practice. (1) Debt consolidation does not lend itself to public scrutiny. Bankruptcy proceedings are a matter of public record and if someone looks hard enough a paper trail can be found. (2) Consolidation loans will appear on a credit report, but they do not automatically lower your credit score as does a bankruptcy filing.

Another nice feature of consolidation is the ability to (3) keep your credit cards unless expressly prohibited by the particular written consolidation agreement created for you. PLEASE be aware that this is not a license to try and obtain additional credit cards to those already attached to your name and credit. That is definitely NOT the purpose of consolidation! (4) Consolidation simplifies your life. You no longer have numerous creditors charging various interest rates. You are now responsible for only one payment to one provider. This one provider may also be able to work with you in providing an interest rate which could make that monthly payment more manageable.

While this all sounds “sweet” you need to know that there is a downside to debt consolidation. Debt consolidation involves a loan. If you use personal property to secure said loan and default on your payments, you will lose that property. In addition some lenders include cross collateralization clauses in their loan agreements. If you use personal property as collateral for a debt consolidation loan and that property happens to have financing attached to it, you could lose that property if you default on your consolidation loan EVEN IF the loan on said property has been kept current!!!!

The possibility of lower interest rates in a consolidation scenario is appealing but it comes with a cost. Those lower rates offered to you are usually attached to a much longer repayment period, which means the longer you stay “in debt” the more money you lay out in payments. A corollary to this “saved” money issue with lower payments involved the IRS. The money you save by engaging in debt relief services MAY BE considered INCOME in the eyes of the IRS. As an example, credit card companies whose debt has been satisfied through debt consolidation agreements can report to the IRS that the debt has been settled; the IRS can interpret this as INCOME.

If you choose debt consolidation it behooves to always stay AWARE. A false sense of security can creep up on you when you see that all those bills are “gone” and you only have one payment to make every month. That sense of emotional well being could lead the less vigilant to incur new debt before the consolidation has been paid off which totally defeats the purpose of the concept.

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