Not everything is sunshine in California. While the sun is warm and the water is nice, there is a staggering 10% rate of unemployment in the sunshine state. This includes a poverty rate that is well above the national average. The state’s economic turn for the worse has created a tide of serious personal debt for many people. Those who took out mortgages before the housing bubble burst, as well as those holding credit card and business loans, seem to be taking the biggest hit. While some consider debt consolidation to be the best option, there are a few pros and cons to look at before you decide if that is the right choice for you. For many people struggling with debt, Chapter 7 bankruptcy is a better plan.
The Pros of Debt Consolidation
If you decide that debt consolidation is right for you, here are some pros you can expect to achieve through the process:
- Debt consolidation programs are more regulated and enforced now than they were a few decades ago.
- It will provide you with a proven and predictable program to become debt free.
- It can save you money, reduce your interest rate, and waive late fees/penalties.
- Allows you to reduce your debts at a pace that fits into your budget.
- Lets you manage multiple debts owed using a single and more affordable payment.
- Will put you back in control of your finances to help reduce your stress.
The Cons of Debt Consolidation
Although debt consolidation programs are better than they used to be, there are still several problems with them, which may push you to look at your other options:
- Sometimes the math doesn’t work out, and the debt consolidation does not outweigh the interest and late fees accrued during the process.
- If you default on payment, you revert back to the original creditor agreement.
- Creditors are not required to accept any debt relief proposals.
- It takes discipline to make every single monthly payment.
- It can take up to 3-5 years, sometimes more, to become debt free. This is mostly due to negotiations with the various companies.
- While you stop paying your bills for debt consolidation, you may be at risk of being sued for the outstanding debts.
- Debt consolidation will be noted on your credit report. Although this is not always harmful to you, sometimes this process can reduce your credit score significantly.
- You may still be required to pay taxes on the forgiven debt.
What to Expect with Debt Consolidation
In most cases, debt consolidation programs are set up by debt relief specialists who will conduct brief interviews with you to better understand your debts. They will also make sure they understand how much you can realistically afford every month for a payment.
With this information, your debt consolidation specialist can help you customize a debt management plan. Once the plan is OK’d by you, a letter will be sent out to all your creditors requesting the benefits of debt relief. If accepted, those creditors are added to the debt consolidation program that was set up for you.
There may be some creditors that do not accept the proposal for debt relief, and you would still be required to live up to the original terms with that creditor. Take this into account when you are setting up the monthly payment you can afford. While you look into debt consolidation, it is important to remember that no two situations are the same, and there is no single debt consolidation solution. This is where a debt specialist can provide more help and details.
Types of Debt Consolidation in California
There are many California debt consolidation programs out there if you want to take that route to get your head back above water. Here we will go over a few options for debt relief in California. These are the options you have if you want to act quickly on your mounting debt, and these options can prevent you from filing bankruptcy or foreclosure.
Debt Consolidation Loans
If you cannot seem to make any headway on your credit cards and other unsecured debt, getting a debt consolidation loan may work for you. These loans, which are offered by a wide variety of lenders, are designed to help you pay off your outstanding debts by consolidating your payment obligations into a single loan. Once you do take out a consolidation loan in the state of California, you will be relieved of any future obligations to your former creditors. Instead, you will only be obligated to pay that single payment on the loan.
While this is a convenient option, there are a few drawbacks. These loans are not typically offered to borrowers who have poor credit, and they can also carry high interest rates, which may make your debt worse rather than better. Also, using a debt consolidation loan can leave a bad mark on your credit score.
Debt Management Plans
When you use a debt management program, your credit counselor will review your household budget and help you come up with a money-saving plan that will lower your obligations without draining your budget. These plans have the power to put a reorder on your entire household budget.
Your credit counselor will be the one to negotiate with each of your creditors in the effort to reduce your outstanding rates. What amount you will actually save depends on the persistence of your counselor and the willingness of the creditors to negotiate. Having a knowledgeable person negotiate this on your behalf greatly reduces your stress levels while increasing your chances of getting a good deal.
California Debt Settlement
This is also known as debt negotiation and is regarded as the one of the better options if available to you. If a debt management program does not give you the results you want, then setting up a tailored program of California debt settlement might be what you need.
This is a several-step process starting with an entire team of debt settlement experts going to bat for you. They will negotiate with creditors to reduce principal balances and you will stop making any payments on your unsecured debts. You will also stop getting those collection calls at all times of the day.
This is a process that could last for a total of 2 to 4 years, but it might take less time in the state of California than if you used a debt management program. If you choose this option, you could easily see a debt reduction into the thousands of dollars.
Bankruptcy is a Good Option
Although it sounds scary, it’s possible that bankruptcy is the best option for your situation. Many debt consolidation companies harshly and falsely criticize bankruptcy. Bankruptcy does not mean starting from zero. If you file for Chapter 7 bankruptcy, for example, you will still be able to keep your personal possessions and many of your assets. You will also be done with the process in a matter of months instead of years. Bankruptcy will halt collections and lawsuits. Both bankruptcy and debt consolidation will harm your credit score, often to a similar extent.
When to Choose Debt Consolidation
If Chapter 13 is your only option (which takes 5 years to accomplish), or you absolutely do not want to file for bankruptcy for another reason, debt consolidation could be for you. If you are willing and able to file for Chapter 7 bankruptcy, it is probably your best option, since it takes less time and provides more financial and legal protection. A good bankruptcy attorney is legally required to keep your best interests in mind. Debt consolidation companies are not required to give you all the information about your other options, and may be more interested in their own ambitions.
As long as you are careful with choosing a debt consolidation plan and are able to stick with it, you should see improvement in your financial situation. With all the different California debt consolidation options, you are sure to find the right option for you and your budget so that you can take that next step to the relief of financial burden.
Daniel A. Higson, Attorney at Law is a debt relief agency pursuant to 11 U.S.C. 528(a)(4) and assists individuals, families, and businesses file for bankruptcy relief under the Bankruptcy Code. This website is a communication under California Rule of Professional Conduct 1-400. No legal relationship is created by the use of this website and no legal advice is provided. No guarantee or warranty is provided that your case or matter will achieve any particular result and testimonials and endorsements provided on this site do not constitute a guarantee, warranty, or prediction about your matter or case. This communication is made on behalf of DANIEL A. HIGSON, State Bar No. 71212 is responsible for its contents. All information contained on this website may be factually substantiated by a credible source, including data from the United States Public Access to Court Electronic Records (PACER) system. Detailed data and information is available on request.