Let’s say you take out a loan to pay for that brand new car or a mortgage to buy that beautiful new home. You never thought you would be able to afford these shiny big-ticket items! …Annnd, it turns out you actually can’t. The interest rates are too high, the payments are too frequent, and when coupled with a new kid, a cold winter with high electric bills, and the Playstation 5 you shouldn’t have put on plastic, it’s all just too much to handle.
That’s where debt consolidation comes in. The legal definition of debt consolidation is simple: a debtor takes out a new loan to pay off an old one. Sounds like it makes no sense, but when you consider the rules, everything becomes easier to understand: the new loan is often offered by a company whose job it is to save a debtor from going bankrupt, and so they offer the new loan at a reduced interest rate. You get to pay off the original loan immediately, but you’re in debt purgatory for a long time as a consequence. Whoops.
Debt consolidation is often recommended to those struggling financially as one of few alternatives to bankruptcy. It’s important to realize that this strategy is not for everyone, and the company helping someone consolidate debt doesn’t actually want the debt paid off any more than the creditor who they bought it from. The point of debt consolidation from this company’s point of view is that it helps a person relax and keeps payments steady but low so that over time the debtor will pay a pretty penny.
Sometimes this means that the original plan was the best one. Large payments with a high interest rate are scary and cause stress levels to skyrocket, but they get the job done sooner than a debt consolidator would. The same is true of those “buy now, pay later” schemes — such as the popular “Afterpay.” They make money because consumers end up paying slightly more over time and feel comfortable making those small payments for big ticket items — which means they will make more of them. This can be a great deal, when used in moderation. But some people will never use it in moderation. It’s too addictive to be safe!
Other alternatives to bankruptcy include debt settlement, lifestyle changes, or selling off all significant big-ticket assets like excess unneeded land or extra vehicles where one will do just fine. Financial ruin is often just a step away — and we mean that, literally, financial ruin is at the heels of nearly half of Americans, who can’t afford a single emergency payment of $400 — and so many of these steps are band-aids designed to get a person through the worst by delaying the problem.
A debt settlement attorney might be able to lend a helping hand with bankruptcy or any of its alternatives, but regardless of how a person gets out of debt, the real trick is making enough changes in life to keep from getting in the same mess for a second time. And that means a financial consultant is another box to check when these problems arise.