Taxes, Lawyers, Business & Debt
What Is Debt Consolidation?
Debt consolidation is a way to reduce debt, allowing the consumer to take out one loan to pay off several other debts. Instead of sending out several credit card or loan payments, the consumer makes one payment to the consolidation company, and the company handles the payment of the other loans. Creditors look favorably upon debt consolidation, as it shows a good-faith effort by the consumer to pay their debt and take responsibility. Creditors prefer a debt consolidation over bankruptcy, as a Chapter 7 filing allows the debtor to completely wipe out their debt, and a Chapter 13 allows for payment of just pennies on the dollar. Debt consolidation offers the creditors a chance to get some of their money back, whereas bankruptcy raises their chances of getting nothing at all. Bankruptcy is also disadvantageous for the consumer- while it allows them to wipe out their debt and begin anew, it also destroys their credit and keeps them from establishing new credit for seven years.
In a debt consolidation, a consumer can reduce or eliminate their debt, combine many monthly payments into just one, and help to keep their credit history cleaner by avoiding a bankruptcy filing. There are many debt consolidation agencies in the US, and there's one in almost every town or city. The Internet is also a good source of information about debt consolidation companies. Debt consolidation can involve the combining of many unsecured loans into one larger unsecured loan, but in most cases, it involves a loan secured against a piece of collateral (usually a home or real estate). The collateral allows for the loan to be offered with a lower interest rate, because the asset's owner agrees to allow foreclosure if they default on the loan. Lender risk is reduced, so rates offered on debt consolidation loans are much lower.
In some instances, debt consolidation agencies can offer a discounted loan. If a debtor is close to filing bankruptcy, the consolidator will get the loan at a lower rate. A smart borrower will look around for a consolidator that will pass some of those savings along to them. Borrowers should keep in mind that a consolidation affects their ability to get rid of debt through bankruptcy, so a debt consolidation is something that should be carefully considered. Consolidation is often the best way to handle credit card debt, because credit cards usually have a much higher interest rate than even an unsecured bank loan. Those with property (such as cars or homes) may get a reduced rate by offering one or more assets as collateral.