Many debtors use debt consolidation in an attempt to repay creditors after their finances spin out of control. But in many cases debt consolidation fails to help debtors repay their creditors and get on their feet. Many debtors waste money in debt consolidation schemes and eventually end up filing bankruptcy after years of avoiding it, here’s why:
- Creditors are not required to play nice. Debt consolidation companies depend heavily on the voluntary cooperation of creditors and their willingness to reduce interest rates, waive penalty fees and not sue the debtor. But as we have seen with the foreclosure prevention programs that have failed over the past two years, most creditors are not willing to voluntarily give up profits. Also, creditors are not legally required to talk to anyone about your debt other than you unless you are filing bankruptcy. On the other hand, once a debtor files Chapter 13 bankruptcy, creditors are forced to the negotiating table. With the power of bankruptcy behind them, debtors can force creditors to play nice.
- Debt Consolidation has a pay to play system, which means that if you can’t make payments on your plan then creditors can just throw in the towel and come after you for the full amount. Think about this for moment, a debt consolidation repayment plan is like Chapter 13 bankruptcy in that it allows a debtor to repay their debts over the course of a few years; but unlike Chapter 13 bankruptcy, unemployment and other crises don’t give you an out. If a debtor is unable to continue to make payments in their Chapter 13 bankruptcy plan because of unemployment, illness or some other valid reason, they can convert their plan to a Chapter 7 bankruptcy or make some other type of arrangement with the bankruptcy court, such as reducing payments.