Risks of Debt Consolidation | DebtSettlementLawyers.com

Debt consolidation is a debt management process where people bundle all their debt such as credit card bills, back car payments and loans into one new loan. The premise of debt consolidation is that it’s better than the harsh alternative of filing bankruptcy. For instance, 5 to 20 creditors are instantly paid because the lender of the new loan pays all the debt. Thus, there are no more harassing phone calls, voice mail messages and demand letters about payment. However, debt consolidation is like fighting fire with fire approach where people can get burned.

Debt Consolidation Risk 1: Losing Secured Property

Debt consolidation loans such as home equity loans or second mortgage placing their homes or rental property up for collateral. The risk of debt consolidation is the loss of homes or rental property. If people miss payments or are late on payments the lender can foreclose on people’s property—even if they are current on their first mortgage. Thus, individuals may lose their homes just to pay creditors—who can sue or garnish their wages but not take property.

Debt Consolidation Risk 2: Higher Interest Rates

Some debt consolidation loans, that are considered unsecured (not backed by collateral), have higher interest rates. Lenders typically charge higher interest rates because the debt consolidation loans aren’t backed by property. Thus, the higher rates assure the lenders payment. The downside of higher interest rates can result in higher payments. This means that one payment can be more than adding up all the payments requested by various creditors.

Debt Consolidation Risk 3: Creating More Debt

According to Bankrate, 70 percent of people who pursue debt consolidation end up with the same debt—or higher—within in two years. In other words, debt consolidation is a temporary solution which may cause more harm since the loans can come with higher interest rates.

Debt Consolidation Risk 4: Doesn’t Help Change Bad Behavior

Individuals with large amount of debt and terrible spending habits won’t learn how to change their behavior. So even if everything goes perfectly (the new lender is completely paid off) people can start spending their way back into debt because they haven’t changed their bad habits.

Seeking Legal Help

People interested in debt consolidation should consult an attorney. The attorney can assist people in exploring all their options such as debt management, credit counseling or bankruptcy.

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