Hi, I’m Roger Ghai. I wanted to talk today a little bit about the differences between doing a debt consolidation versus a bankruptcy. A debt consolidation program has an advantage because it’s private, it’s between you and the creditors. There are no public records of you filing a bankruptcy which, of course, if you file a bankruptcy, the information is on your credit report for 10 years. As far as the debt consolidation process itself, there are several disadvantages.
Let’s begin with the first one. A disadvantage of the debt consolidation program is basically that it only deals with unsecured debt, that is credit cards or your medical bills, something like that. It’s not going to help you out at all with your past due mortgage payment or if you’re past due on your car or furniture payment or something like that. A second disadvantage of doing the debt consolidation program is, really, that a lot of times, the companies will negotiate on your behalf, a lump sum settlement, I should say, with the credit card company and you have to pay taxes on any amount that was forgiven.
Let me give you an example. Let’s say that your credit card bill was $10,000 but that the debt consolidation company negotiated a reduction to just $5,000. What’s going to happen at the end of the tax year is that the IRS will send you a 1099 form and ask that you pay income tax on the balance that was not paid to the credit card company. In this case, you’d have to pay income taxes on $5,000.
A third disadvantage of going with a debt consolidation company is, really, that the monthly charges that you end up paying to the debt consolidation company can oftentimes be equal to or greater than the amount of your monthly obligations to your credit card companies. You’re not getting a lot of financial benefit out of that. I would say that a final and probably and a fourth disadvantage of using a debt consolidation program or a company is that, many times, they’ll have you consolidate your debts, take out a mortgage on the house, and then what you’ve done is you’ve traded what would normally be debt that you could discharge in a bankruptcy for debt that you cannot discharge.
The reason that’s important is because if you’ve consolidated everything, taken out a second mortgage, let’s say, you fall behind on that second mortgage, you lose the house if you can’t pay it. Those are the disadvantages of debt consolidation programs. If you have any questions as far as whether you should file a bankruptcy or go with the debt consolidation agency, feel free to call me at 770-792-1000.
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