Can you consolidate or negotiate your way out of debt?

With a bad economy, incomes down, and equity in real estate all but evaporated, millions of people are struggling to pay their debts. More and more homeowners have to choose between paying their mortgages, or making payments on other debts, like credit cards and medical bills.

It’s no wonder that desperate people grasp at straws. The question is, do any of those straws really work to help them get out of debt? When it comes to unsecured debt like credit card bills, in most cases the answer is no. There may be some debt relief for a few, but most people who are mired in debt won’t find a solution in debt consolidation or negotiation. Let’s take a look at why this is so.

Many people come to see us with an unrealistic view of their debts, and rarely understand how overextended they are. So when they hear that a neighbor had a debt negotiated down to 20 percent of what she owed, they assume that a good attorney can do the same for them. Unfortunately, the majority of people who want to negotiate debts are in no position to handle the settlements that might be offered.

It takes money to negotiate settlements. If you are unemployed or have too little money to easily pay regular bills such as mortgage or rent, food, transportation and other daily living expenses, then there is no sense trying to negotiate other bills. There is no money left over to negotiate with.

Nearly all people with serious debt problems have many unsecured debts, not just one or two. It won’t work at all to negotiate just part of the debts. There must be enough cash flow to negotiate and settle all of them; otherwise the process is doomed to failure. It doesn’t help to negotiate some debts, only to have creditors for other debts take them to court.

It is also important to know that debt negotiation and settlement can also take a very long time. Even with attorney representation, there is nothing to prevent creditors from suing you and getting a court judgment in the midst of negotiations. It happens all the time.

A few people may be successful with debt negotiation. They reach debt settlements with all the creditors, and make all of the scheduled payments over months or years. But their credit rating takes a big hit, and the debts will not be shown as “paid in full,” but rather “settled.” And you are still not out of the woods. More money may be needed – any forgiven debt is 1099’d and you may owe taxes on it as income.

What about debt consolidation? Does that work for people swimming in debt? The answer is usually no. Consolidating debts does not reduce the amounts owed; it simply gathers up all of the amounts owed, and provides a way to make one payment each month to cover all the payments due. That payment goes to a debt consolidator or agent, who, of course, charges a substantial fee for the service of taking your money each month and making sure it is paid out to each creditor on time and in the right amounts. In recent years, there have been many debt consolidation scams that have ripped off millions of dollars from people who made their payments and later learned that the agent never paid the creditors, or paid them late, accruing penalties and higher interest rates, leaving them in a worse situation than when they started.

There are also debt consolidation loans – offered at high interest rates to those who don’t have enough cash flow to cover all their bills every month. This option is even worse, in most cases. The loan will rarely cover paying off all the debts owed, so not only do you still owe lots of money to creditors, you also now owe on a new loan to another creditor, and have a higher total debt than you started with.

Debt consolidation and consolidation loans may just prolong and add to consumer debt. They usually don’t get people out of debt at all.

So, what is the answer? If you are deeply in debt, and don’t have the cash flow to pay all your creditors on time every month, consider bankruptcy as an option. In most cases, bankruptcies get rid of the debts permanently (Chapter 7) or, in Chapter 13, the bankruptcy trustee arranges with all the creditors to be paid in regular installments (often reducing the total balances owed) and you have an orderly way to pay off your debts over a period of three to five years. Now that is true debt relief.

This article was originally published HERE.