Observing so many customers struggle in these programs made me realize that the majority of individuals lack a comprehensive understanding of how debt consolidation works. The majority of people believe that bankruptcy will inevitably destroy them financially and will go to great lengths to avoid it at all costs. Unfortunately, debt consolidation can have the same long-term impact on your credit score as bankruptcy, without eliminating your debt.
This article explains how debt consolidation works and why many customers would benefit more from declaring bankruptcy.
The Process of Debt Consolidation
When you enroll in debt consolidation, you must promptly stop paying on all unsecured debts (e.g., credit cards). The debt consolidation service will then require you to make a monthly deposit into a trust account. The concept behind debt consolidation is to accumulate funds in this bank account. Once the pool reaches a sufficient size, the debt consolidation company negotiates and pays off your debts using the funds.
What Debt Consolidation Companies Do Not Share
What many debt consolidation companies don't tell you is that your credit score takes a blow every month you don't pay your credit cards. If it takes two years to save enough to begin negotiating your debts, then your credit score has steadily decreased over the past two years. Also, debt consolidation companies lack the ability to prevent your unpaid bills from submitting a lawsuit for collection. If you are being sued for nonpayment while attempting to save enough money to begin negotiations, your credit will take a blow from the lawsuit, and a judgment could be entered, further lowering your score. After you have been prosecuted and a judgment has been rendered against you, the debt collector can garnish your wages and seize your bank accounts. Additionally, consolidation of debt cannot halt garnishments or levies.
Debt Consolidation is Very Expensive Over Time
Most debt consolidation companies are compensated by deducting a percentage of your monthly payment from the trust account. As a common debt consolidation fee, 10% of the monthly deposit you make into the trust account is not uncommon. The longer it takes you to accumulate a sum of money, the more money debt consolidation companies earn. Debt consolidation companies cannot also guarantee the duration of the debt negotiation process. If, after two years of pooling money, the credit card companies refuse to settle for the amount that you have pooled, you must deposit more money into the trust account to try to pool a larger balance, all while continuing to not make payments on your unsecured debts and experiencing a decline in your credit score.
Who Debt Consolidation Is Effective For
This does not imply that consolidating debt is always a poor idea. Debt consolidation makes sense for people who have access to an initial pool of funds (such as an inheritance or a family gift) because you should be able to settle your debts swiftly without missing many months of credit card payments. If you do not need to aggregate funds over an extended period of time, you can save a significant amount on consolidation fees. When you begin with a pool of money to invest, the debt consolidation company can immediately begin negotiating your debts so that you have fewer missed payments on your credit report. Those with a substantial amount of additional income each month may also benefit from debt consolidation, as it facilitates the creation of a savings pool. The issue is that the majority of debt consolidation clients do not fall into this category.
Why Bankruptcy Might Be a Better Option
The majority of clients who end up hiring my firm after attempting a debt settlement program say, in hindsight, that filing for bankruptcy would have been much cheaper, much quicker, and would have eliminated their debts immediately. They frequently regret not consulting with a bankruptcy attorney sooner to learn how bankruptcy may be able to help them. When speaking with bankruptcy clients who have previously attempted debt settlement, there are several common reasons why bankruptcy was a preferable long-term option for them.
You will precisely know when you will be debt-free.
When you employ a bankruptcy attorney to file your case, a reputable attorney will be able to give you an exact timeline for the completion of your case. According to bankruptcy regulations, your debt will be deemed discharged as of the filing date of your bankruptcy petition. This means that as your case progresses through the court system, your credit will not be negatively impacted on a monthly basis while you wait for the case to be approved. Your credit score will experience a one-time decline as a result of the bankruptcy petition, not a gradual decline with no foreseeable endpoint. After the conclusion of your case, you can promptly begin the process of reestablishing your credit.
Insolvency halts lawsuits, levies on bank accounts, garnishments, and foreclosures.
The filing of a bankruptcy petition will promptly put a stop to collection lawsuits. It will also prevent bank account garnishments, wage garnishments, and foreclosures. The ability to halt these legal actions against you is a direct result of an order from the US Bankruptcy Court granting you immediate relief from your creditors. If a creditor continues to pursue collection efforts against you, you may petition the Bankruptcy Court for relief from the harassment.
You are protected from future creditors by a court order.
One bankruptcy filing will eliminate all of your debt. You do not need to negotiate your debts separately with each individual creditor. In the event that you encounter problems in the future with a creditor, you have a court order that formally discharges your debt. If a creditor refuses to acknowledge that their debt was discharged in bankruptcy, you may petition the United States Bankruptcy Court to help you enforce your court Order.
You'll Know the Price in Advance
When you employ an attorney to handle your case, he or she must provide you with a written estimate of the fees involved. This means that you will have a written agreement specifying the fees you will be required to pay. Knowing exactly how much your case will cost allows you to begin saving promptly for your attorney's fees. Additionally, you can conduct a cost-benefit analysis to determine if the bankruptcy attorney fees are worth the amount of debt you are eliminating.
You Can Confirm Your Lawyer's Reputation
The State Bar regulates bankruptcy attorneys, which means they must adhere to ethical standards, charge reasonable fees, and hold a license demonstrating competency in their profession. If you engage a bankruptcy attorney and they fail to deliver on their promises, you can file a complaint with the State Bar. Additionally, prior to employing a bankruptcy attorney, you can view their profile on the website of their State Bar to confirm that they have not received any complaints from previous clients. There is no comparable organization that regulates debt consolidation companies.""
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