Sometimes when faced with numerous loans and credit card bills, the first step people try is obtaining a debt consolidation loan. The attraction is obvious – a single, lower monthly payment where a lot of unmanageable monthly payments used to be.
Remember a debt consolidation loan does not actually reduce your debt. Although debt consolidation may lower your monthly payments you still have to be able to afford those payments over the life of the consolidation loan. When taking out a consolidation loan the first step should be to make a budget to keep you on track and reduce spending where you can. A budget is a plan of where your money will go each month and will help you to know exactly how much money you can afford to pay each month towards debts.
While debt consolidation is a good option for some, for others it can be dangerous and drive you further in debt, just the opposite of what you want.
Why Debt Consolidation Often Fails
How does this happen? Well, it’s not too hard to understand the potential risks of consolidating debt with a loan:
- Poor credit and no assets to pledge as security, may be making it hard to secure a consolidation loan at a reasonable cost.
- You extend the term of the loan too far. The math is pretty simple – the longer the term, the lower the monthly payments. However the lower the payments, the more interest you pay, the longer it takes to get out of debt. Life has a funny way of intervening in the meantime. Someone in the family loses their job, unexpected expenses crop up. Now you’re missing even these payments and you’ve tapped out all your credit resources.
- You didn’t consolidate all your debt. This is a common one. You went to the bank and they said they would give you a second mortgage of $35,000. You used this to eliminate some, but not all of your credit card debts. You figured with the lower monthly payment you could deal with the other credit cards on your own. Again, life got in the way and the extra debts remained, and perhaps even increased.
- Your debt payments still took too large a percentage of your monthly budget. Before you take on any consolidation loan, make sure there is enough savings that you can a) afford the payments and b) get ahead. Otherwise you are just trading dollars and not getting anywhere.
Now What? Can You File Bankruptcy After Consolidating Debt?
You may find yourself at a point that you tried the debt consolidation program, failed and are wondering, what now?
If you are struggling with your consolidation payments you can look into two options when a debt consolidation program fails, that could be a solution for you:
- Bankruptcy – If you have little or no assets, and your income isn’t high, then bankruptcy could be an answer.
- Consumer Proposal – A consumer proposal allows you to pay back a portion of what you owe to your creditors when you can’t afford to pay them back in full.
Both options will give you protection against legal action from your unsecured creditors.
If you are missing your payments on your debt consolidation loan, call us to discuss filing a bankruptcy or a consumer proposal and get the fresh start you need.
If you are considering a consolidation loan, but haven’t signed on the dotted line yet, call us anyway for a free consultation. We would be happy to take a look at the numbers with you and see if you will succeed by trying a consolidation loan or if you should save yourself the extra time and stress, and look at another option first.