What is debt consolidation?
Debt consolidation is when separate individual loans and debts are grouped as one loan. This happens, for example, when a debtor has several credit cards and he owes money on all of them. Each month, he has to make payments on all of his credit cards. He can consolidate all the credit card debts and group them together so that he only needs to make one payment.
How is debt consolidation work?
The debtor can take out a secured loan (one which is secured by a collateral), such a home equity loan. He takes the cash proceeds of the loan and pays off all the credit card debts so that he only has the secured loan to pay. The debtor can also take out a personal unsecured loan. He pays off all the credit card debts and simply makes one monthly payment on the personal loan. Debt consolidation can also be accomplished through balance transfers. To qualify for any sort of consolidation or equity line the debtor will have have to have good or excellent credit, which is often not the case. A low or less than good credit rating could result in denial of the loan or a high interest rate on the loan. However, taking out a big loan to pay off smaller loans may actually serve to pull the debtor deeper into debt. By consolidating his loan, the debtor may have to pay more money for a longer period of time.
Is debt consolidation a good alternative to Chapter 13 bankruptcy?
A debtor who files a Chapter 13 bankruptcy petition submits a payment plan where he lists all debts and promises to make payments on them. The debtor makes only one payment to the Trustee and it is the trustee that distributes the payment to his creditors in accordance with the legal priority of the creditors. Thus, filing a Chapter 13 petition effectively consolidates all debts. Aside from this, the period within which the debtor has to pay off all his debts is limited to a period of three to five years.
Before opting for debt consolidation, it may be wise to consult with a New York Bankruptcy Attorney to see whether filing a Chapter 13 petition may be more beneficial to the debtor than debt consolidation.
We at the Maxwell Law Firm PLLC, assist in client debt settlement, foreclosure defense, tax collection defense, filing for Chapter 7 and 13 bankruptcy, and mortgage home loan modifications. Contact us and speak to our competent and experienced New York Bankruptcy Attorney so that you can get the debt relief you are seeking. Please give us a call at 718-701-0095 to discuss your options