Debt, often created by revolving lines of credit, is a reality for most adults. People need credit to absorb unexpected expenses or to cover budgetary shortfalls when their income is lower than they expect one month. Debt tends to slowly accumulate over time, which can make the payments due on it harder to manage while also limiting how much credit someone has available.
Especially when individuals have numerous revolving lines of credit, they might make mistakes regarding when they send payments or find themselves overwhelmed by the many financial obligations that they must satisfy each month. Debt consolidation is one of the ways that people try to take control of mounting personal debt. In the form of a personal loan, a credit card transfer, credit cards or a debt management plan, debt consolidation takes multiple lines of credit and reduces them to a single payment made to the consolidation loan provider. While they seem beneficial on paper, consolidation loans can often do more harm than good.
Why debt consolidation doesn’t always help
The number one reason that debt consolidation is not the ideal solution for overwhelming personal debt is that it does nothing to reduce or eliminate someone’s debt. In fact, it will very likely increase the total amount that they owe. Consolidation loans often have annual fees or origination fees that can cost someone hundreds or even thousands of dollars in addition to the debt they want to consolidate and will have to pay off over time. Although many debt consolidation loans offer a tempting initial interest rate, some of them charge higher long-term rates. Many others have sharp penalty rate increases that they will impose if someone makes late payments.
Bankruptcy is actually a debt solution
Unlike debt consolidation, which often means taking on a new loan and possibly going even further into debt, a personal bankruptcy provides an opportunity to eliminate someone’s financial obligations. A successful Chapter 7 bankruptcy filing will result in the discharge of eligible debts, which means that someone will not have any obligation to continue paying them.
Understanding the limitations of the for-profit debt solutions offered by many businesses may help those struggling financially make better choices for their financial recovery.