In Bankruptcy Information, consumer law

You hear the commercials all the time: get a loan from us to consolidate all your debts into one payment that will be lower than what you’re now paying. Lower payments! Why wouldn’t you do that? Here are a few reasons why not.

Collateral. If you have large amounts of credit card debt, that’s unsecured debt. Unsecured debt is debt where the creditor doesn’t have any collateral, has nothing he can take back (like a car, furniture, house, etc.). If he wants to collect he has to sue you, get a judgment and then, maybe, he can take your property. Most debt consolidations lenders want some form of collateral. If you have it (equity in your house, a car, a bank account), you’ve suddenly converted that unsecured debt into secured debt. That makes it easier for the creditor and harder for you.

Flexibility. Once you pledge your house, car or other property as collateral, it makes it more difficult for you to sell or refinance, should you need to. You’ve tied yourself tighter with you debt, not made things looser. And if the worst happens and you have to file bankruptcy you’ll either lose that collateral or end up paying the debt in full. If it’s unsecured debt, you can wipe it out.

Exempt assets. Some debt consolidation lenders might ask for a pledge of your retirement assets. DON’T DO IT! Those assets are exempt, meaning creditors can’t touch them unless you give them permission to, which is what pledging them does — it gives the creditor permission to take assets he couldn’t otherwise touch. And while I’m on this subject, don’t borrow from retirement accounts to repay creditors. Again, they aren’t entitled to touch those funds and using your retirement to pay off debt puts you farther behind in the race to ever retire. Even if you repay yourself with interest, you’ll be worse off after the loan is repaid because there was that much less principal growing in your account during the repayment period.

Freed-Up Money. If you do get a debt-consolidation loan and it really does lower your monthly payments, all of a sudden you have some excess income. What are you going to do with it? Most people will look at it as free money, money that isn’t allocated somewhere else. Will you save it or spend it? The big majority of people end of spending to the limits of their income. With that extra income you might be tempted to get a new car. Soon, if you’re not careful, you’re back in debt worse than before.

So, what should you do if debt is drowning you? First, talk to a professional, an accountant or financial adviser or attorney. A banker isn’t on my list because they have a vested interest in making you a loan to get out of debt. You need a neutral, third party who can assess your situation. Maybe a debt consolidation loan will work. If it will, the professional will show you what else, besides just borrow the money, you have to do. If your situation is almost hopeless, you might need to consider bankruptcy. If so, contact us; we can help.

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