A Cautionary Tale About Debt Consolidation

There is absolutely no doubt that getting calls or letters from a number of different collectors or collection agencies at once is beyond frustrating. It is hard to keep track of just how many bills will have to be paid each month, when and how much the payment will have to be. This is why a number of people dealing with debt turn to debt consolidation, and many attempt to complete it on their own.

Debt consolidation allows a person to pay off individual creditors in order to only owe one bill each month and in some cases at a lower interest rate. Seems like a great solution, but there are risks involved especially when going it alone or even using a consolidation firm.

The first major risk to note is the possibility of losing your home. Many people focus on paying their mortgage to keep a roof over their heads, but a major source of debt consolidation is using your home as collateral. Refinancing allows people to take out cash at the closing to pay off other debts such as unsecured credit card debt with high interest. The problem is that now the debt owed is secured by the home and subject to foreclosure when payments are missed.

Another option is to take out a personal loan. This is not always available for those with a lower credit rating, but taking out a personal loan is often accomplished with an interest rate higher than on the debts already owed. In the end, someone may end up actually paying more.

A final major warning is that debt consolidation only shifting debt and not eliminating any of it. Sure, some individual debts are paid off, but new debts are created in order to do so. For those who want to eliminate overwhelming debt, bankruptcy is a more viable solution.

Source:KLTV, “Eight facts about debt consolidation,” Andrew Housser, March 25, 2013

Bankruptcy provides a route for debts to be discharged. Visit our Tampa website to learn more about the process.