FindLaw KnowledgeBasePublished: 2011-11-29
For many buried in debt, their options seem limited. Late night cable ads and mailers advertising debt consolidation showing the happy faces of ‘debtors’ (really actors) singing the praises of debt consolidation appear to offer and easy and sunny solution.
The reality of debt consolidation programs is often much darker with creditors holding decks stacked against unwitting debtors. Anyone considering debt consolidation in Chicago should understand its problems and explore the available alternatives for debt relief, including bankruptcy.
The most common offer people see is a debt relief agency who promises to negotiate a debt settlement for a fraction of what is owed with a minimal impact on their credit scores. It sounds appealing, right? Here’s what they don’t advertise.
Debt consolidation companies cannot guarantee that the credit card company will agree to accept less than what is owed. They may not even be able to stop the late fees, interest and other penalties that created the problem.
A debtor’s credit may also suffer. Credit card companies are required by law to report any delinquencies on payments to credit reporting agencies. Any delay in payment may result in a negative mark on a debtor’s credit report.
The rudest awakening for many people using a debt consolidation company is the arrival of a lawsuit. Debt consolidation companies cannot prevent creditors from suing the person who owes them. This means that people could face wage garnishments even if they are working with a debt consolidation company.
The Home Equity Solution
Yet another avenue for debt management is lowering the cost of credit by consolidating debt through a second mortgage or a home equity line of credit. There are a few problems with this option.
The first problem with these loans is that they require debtors to pledge their homes as collateral. This means converting unsecured debt into secured debt. Debtors who fail to make the payments on these debts could face foreclosure.
Another problem with home equity lines of credit is that they rely on equity in the homestead. In today’s economy, most homeowners are underwater on their mortgages and are unable to obtain this type of loan.
Finally, there are costs to home equity loans. In addition to interest on the loan, these loans may have "points" attached to them, with one point equal to one percent of the amount borrowed. This can quickly add up to a significant amount of money.
The Advantages of Bankruptcy
Bankruptcy may feel like a last resort, but there are several benefits that bankruptcy can offer that may be better for debtors in the long run. Bankruptcy offers a fresh start to many struggling families and while a bankruptcy can be reported on a credit report for up to ten years, it generally does not take that long for people to re-establish their credit.
Bankruptcy also provides a shield against creditors. Once a bankruptcy has filed, creditors cannot garnish debtors wages and are prevented from contacting debtors directly.
If you are overwhelmed with the bills you owe to creditors, you should speak with a Chicago bankruptcy attorney who can review your situation, explain the differences between Chapter 7 and Chapter 13 bankruptcies and discuss your options for getting your financial house in order.