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Is Debt Consolidation The Answer to Debt Relief?

Using Alternative Methods to Lower Your Debt

If you have significant debt, then you might have been contacted by a debt consolidation company that offered you a solution that sounds too good to be true: consolidating your debt into one account and avoiding bankruptcy. However, when something sounds too good to be true, it usually is. There are many downsides to debt consolidation that such companies and representatives will never tell you.

Speak to a Lawyer Before a Debt Consolidation Company

At Watton Law Group, we want everyone who needs debt relief to truly use the correct legal tools and channels. Before you get fooled by a debt consolidation company’s services, please call us at (414) 409-5422 and discuss your situation with our attorneys. We will give you our honest and informed opinion about debt consolidation and if there are better solutions like a Chapter 7 or Chapter 13 debt adjustment through the courts. We genuinely care about you and your family’s financial future.

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The typical private debt consolidation plan is to try to negotiate your debt through payments or an offer of a lump sum that is less than your overall balance. Typically, you will cease making payments directly to the creditors you have enrolled in the plan and start making a payment to the company in lieu of those payments. As the company builds up money, they will attempt to negotiate directly with the creditors. While you continue to make these payments, typically no money is flowing to the creditors.

The Hidden Truth Behind Debt Consolidation

Debt consolidation companies promise to take your debts, combine them into a new account, and negotiate. It sounds like an easy way to reduce your debt and the amount of interest you pay overall. But the truth is that debt consolidation is just a commercial service sold to consumers. Unlike bankruptcy, it is not a legal process and right as guaranteed under the United States Constitution.

When a debt consolidation provider talks to your creditors, there is no guarantee that the creditors will be interested. They are not obligated at all to work with the debt consolidation company. Nothing stops the creditors from suing you and garnishing your wages if they do not accept the negotiation or if it takes too long to come up with the funds necessary to settle the account.

In short, debt consolidation is problematic because it is not a debt relief method that is officially backed and protected by federal law. If you take this route, then you will be putting your faith, finances, and future in the hands of a process that might not make a positive difference.

Understanding the Risks of Choosing Debt Consolidation

The main risks of debt consolidation if it does not help your situation are:

  • Credit score damage: In the process of consolidating your debts, these companies will tell you to stop paying your debts directly. These missed direct payments will reflect on your score. Also, if they are successful, they will be settling the debts for less than the amount owed, which will be negatively reflected. As a result, your credit score could be worsened before your debts are even consolidated.
  • Unadjusted interest rates or amounts of debt: There is no guarantee that a lower overall interest rate or amount of debt will be possible through debt consolidation. Your creditor's participation in these types of programs is 100% voluntary.
  • Losing collateral property: Debt consolidation won’t negotiate agreements to catch up on missed mortgage or car loan payments. You could still lose your home to foreclosure or car to repossession.
  • Significant fees: Debt consolidation companies do not work for free and most take their fees upfront before any money goes to your creditors. You will owe them fees for their services. If the consolidation is not successful or makes things worse, then you will have to pay them, which is probably not a cost that your finances can take.
  • Increased debt: When all of the other potential consequences of debt consolidation are factored together, it is possible that you can end up with more debt than when you started.
  • Tax consequences: The forgiveness of debt other than through bankruptcy or while insolvent is considered taxable income. Even if the debt consolidation company is successful, you could still face a significant IRS bill in the end. Next tax season after a debt consolidation, you will have to show proof that the amounts that were forgiven are not counted as income, too.
  • Lawsuits: Typically, the first step of debt consolidation is to stop paying your bills and instead start paying money to the debt consolidation company. When this happens, creditors will often get impatient and initiate a lawsuit to collect. If this happens before there are sufficient funds to settle the debt, you could face garnishments and other aggressive collection attempts.
  • You may still wind up in bankruptcy: If the debt consolidation fails or if uncovered debts become too pressing, you will most likely wind up in bankruptcy after several months or years.
  • Most debts are ineligible: Debt settlement companies focus on credit cards and unsecured signature loans. They do not usually work with student loans, secured loans (like vehicles and houses), payday loans, and medical bills.

Bankruptcy: A Viable Alternative to Debt Consolidation

Rather than rushing into debt consolidation, you should speak with Watton Law Group about Chapter 13 or 7 debt adjustment through the courts. Bankruptcy can be an incredibly helpful and positive process, especially when it is managed by a professional bankruptcy attorney. When done right and in certain circumstances, bankruptcy can discharge all or most of your debt, allow you to keep all or most of your important assets, and make a minimal and reversible impact on your credit score.

Contact Us for Personalized Debt Solution Advice

If you are struggling with debt, do not head straight to a debt consolidator’s office. Instead, come to Watton Law Group and let our attorneys know about your situation. We will give you an honest and transparent assessment of what we think the best way forward will be. For many of our clients, filing for a Chapter 13 debt adjustment or Chapter 7 instead of using debt consolidation has been far more effective and far less frustrating, so this might be the case for you, too.

Seek reliable legal counsel by using an online contact form now.

Meet Your Team

  • Michael J. Watton, Esq.
  • Michael J. Maloney, Esq.
  • Timothy H. Hassell, Esq.
  • Thomas A. Arany, Esq.
  • Kirk M. Fedewa, Esq.
  • Robert K.S. Abernathy, Esq.
  • Bennett S. Stuckey, Esq.
  • Corrine E. Edwards, Esq.
  • Tyler Rasmussen, Esq.
  • Eli Poferl, Esq.
  • Royce V. LoBianco, Esq
  • Marji Hanson, Esq.
  • Elizabeth Cho, Esq.
  • Alexandra M. Birkner, Esq.
  • Lauren Suchan, Esq.
  • Michael J. Watton, Esq. Michael J. Watton, Esq.

    Senior Partner

    Attorney Watton is a leading national consumer bankruptcy attorney who has guided thousands of individuals through debt consolidation plans and bankruptcies.
    Michael J. Watton, Esq. Photo
  • Michael J. Maloney, Esq. Michael J. Maloney, Esq.

    Managing Partner

    Attorney Maloney currently heads the firm’s bankruptcy department. In addition to bankruptcy, Attorney Maloney has successfully pursued payday lenders, debt collectors, and banks in state, federal, and bankruptcy courts for violations of consumer laws.
    Michael J. Maloney, Esq. Photo
  • Timothy H. Hassell, Esq. Timothy H. Hassell, Esq.


    Mr. Hassell is a partner in the firm whose practice focuses on bankruptcy law. Attorney Hassell received his law degree from Marquette University in 2010 and his undergraduate degree in economics from Brigham Young University in 2007.
    Timothy H. Hassell, Esq. Photo
  • Thomas A. Arany, Esq. Thomas A. Arany, Esq.


    Attorney Thomas A. Arany is a partner whose practice focuses on bankruptcy law in Colorado and Utah. Attorney Arany received his law degree from the University of Colorado School of Law in 2010.
    Thomas A. Arany, Esq. Photo
  • Kirk M. Fedewa, Esq. Kirk M. Fedewa, Esq.


    Attorney Kirk M. Fedewa is an associate attorney whose practice focuses on bankruptcy law in Wisconsin. Attorney Fedewa received his law degree from Marquette University Law School in 2014.
    Kirk M. Fedewa, Esq. Photo
  • Robert K.S. Abernathy, Esq. Robert K.S. Abernathy, Esq.


    Attorney Robert K.S. Abernathy is an associate attorney whose practice focuses on bankruptcy law in Missouri and Kansas. Attorney Abernathy received his law degree from Rutgers University School of Law in 2011.
    Robert K.S.  Abernathy, Esq. Photo
  • Bennett S. Stuckey, Esq. Bennett S. Stuckey, Esq.


    Attorney Bennett S. Stuckey, Esq. is an associate bankruptcy attorney who takes a compassionate approach to helping clients find debt relief. Born and raised in Arkansas, he serves clients throughout the state from Watton Law Group’s office in Little Rock.

    Bennett S. Stuckey, Esq. Photo
  • Corrine E. Edwards, Esq. Corrine E. Edwards, Esq.


    Attorney Corrine E. Edwards began her legal career with the understanding that it would allow her to follow her two passions: ...
    Corrine E. Edwards, Esq. Photo
  • Tyler Rasmussen, Esq. Tyler Rasmussen, Esq.


    Tyler Rasmussen is a seasoned attorney with expertise in bankruptcy, landlord/tenant, foreclosure, Social Security, and ...
  • Eli Poferl, Esq. Eli Poferl, Esq.


    Meet Eli Poferl, Esq. of Watton Law Group. Driven to help people out of tough times, he tackles the toughest bankruptcy cases. Call to learn more.
    Eli  Poferl, Esq. Photo
  • Royce V. LoBianco, Esq Royce V. LoBianco, Esq


    Royce LoBianco is a skilled bankruptcy attorney with Watton Law Group, practicing in Arkansas. He is passionate about showing ...
  • Marji Hanson, Esq. Marji Hanson, Esq.


    Marji Hanson is a highly experienced bankruptcy attorney with Watton Law Group. Having spent most of her life in Utah, she is ...
  • Elizabeth Cho, Esq. Elizabeth Cho, Esq.


    Elizabeth Cho is a trusted and accomplished bankruptcy attorney with Watton Law Group. She helps clients throughout Wisconsin ...
  • Alexandra M. Birkner, Esq. Alexandra M. Birkner, Esq.


    Alexandra M. Birkner is an associate attorney who focuses her practice on bankruptcy cases. She understands that reputable ...
  • Lauren Suchan, Esq. Lauren Suchan, Esq.


    Lauren Suchan is a passionate bankruptcy attorney with Watton Law Group, working out of our Kansas City office. She is ...
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