Can Debt Consolidation Help?

If you are unable to repay your debts, you may have considered debt consolidation as a possible option. The process typically consists of taking out a single loan to pay off all of your existing accounts. But is this debt relief method capable of providing a lasting solution to your financial problem?  In most cases, the answer is no, the consolidation process does not provide an effective solution.  More often than not, it does not adequately help to give you the true debt relief that you need. What's more, it may end up hurting you financially.  Here's why.


The entire premise behind debt consolidation is that you will ultimately pay off all of your debt.  Theoretically, you would think that a program that pays off all of your debts is a practical and realistic solution.  But as any experienced San Diego bankruptcy attorney can tell you, clients who attempt the consolidation process usually end up filing bankruptcy.  The reason is that while you are making payments toward the pot of money that is supposed to be set aside and they used to settle each of your individual accounts, your balances keep rising.  Then you have to pay a larger amount of money to settle the accounts.  Meanwhile, you are paying monthly fees to the consolidation company.  The result is that, in most cases, one to two years into the process you realize that you are still where you started.  Had you file bankruptcy two years earlier, you could have been working on rebuilding your credit for the past two years. 


A different, but less common, type of debt consolidation involves taking out a new loan to pay off all of your debts, and then making payments on the new loan.  The problem with taking out a new loan is that if you file bankruptcy after taking out a new loan, the lender who gave you the new loan can claim that you obtained the loan without the intention to repay it, which is a type of fraud (a promise without intention of performing it).   This option assumes that you even qualify for a loan.  If you are close to bankruptcy, you might have trouble qualifying for a personal loan.


So if you need to get out of debt San Diego, talk to an experienced attorney about all of your options.  If you are considering consolidating your debts, make sure you understand the downside risks involved and weigh your options carefully. If you have high interest credit cards, it is very unlikely that debt consolidation will be a good solution for your situation.