When many of our potential clients speak with our Myrtle Beach Bankruptcy Attorney Huong Lam, they often ask about debt consolidation. You’ve probably seen commercials about it—with just a small monthly payment to one company, you can pay off all your debt and avoid bad credit! It certainly seems like a magical fix to the pressure of owing money. Why would anyone choose bankruptcy over this? While there may be reputable firms out there that can do this, there are also some that make empty promises and leave you in a worse situation than you were in before.
What exactly does debt consolidation promise you? Usually, they offer to roll all or most of your debt into one payment. In some cases it offers a lower interest rate, but the largest pull is not having to pay several creditors each month. What they do NOT tell you is that their low interest rates are often only for a limited time and the loan can also include fees and costs that you would have not had to pay with your original creditors. If this sounds scary, just wait. If this option actually saves you money, the IRS may consider that saved money as income which means that you may have to pay taxes on it. All your creditors have to do is report the settled debt to the government.
Still here? There is one more thing about debt consolidation that can be worrisome. Your original creditors and lenders are under no obligation to accept a settlement with these companies. In fact, many people have found that they have been paying on a consolidation loan for months, even years, and their debt has not gotten any smaller and their credit score has not gone up. They find that the consolidation company has been “holding” their money until they can get an agreement with the creditor. When that falls through, they say that they never guaranteed anything.
So what are people supposed to do if they can no longer handle their debt? Bankruptcy has long had a stigma of being a terrible ordeal and should only be a last resort. While it is true that you should not use it as a crutch and file with abandon, it is not really a stigma anymore. Those who file a Chapter 7 petition are typically debt free (with some exceptions) within ~90 days. With a Chapter 13, you pay a percentage of your unsecured debt to the Trustee for usually 3 or 5 years. In some cases, your secured debts are included in the payment. If your creditors do not file proof of the debt you owe, then they won’t get anything and the debt will be discharged at the end of the plan. And those tax consequences that you could have in debt consolidation? Those don’t happen with bankruptcy. The discharged debt is not considered income with the IRS.
Are you interested in learning more about bankruptcy and why it may be the safe, efficient solution to your financial issues? When the time is right for you, give our office call and set up your consultation with our experienced Bankruptcy Attorney at Lam Law Firm. We are here to help you with your fresh start.
