Two Hidden “Legal” Risks of Debt Consolidation Loans

Debt consolidation is combining outstanding loans (debt) into a single package (consolidation). The debts therefore become one “new” loan, and instead of making several small payments on the loans you used to have, you make one larger payment on the new loan. Occasionally people ask whether debt consolidation is a good, economically constructive solution to credit card problems. Usually, the answer is that it is not. Certainly not as a solution all by itself. This article discusses some of the drawbacks of debt consolidation.

Debt Consolidation Loans

Debt consolidation is combining outstanding loans (debt) into a single package (consolidation). The debts therefore become one “new” loan, and instead of making several small payments on the loans you used to have, you make one larger payment on the new loan. Ideally and typically—and what has made debt consolidation loans popular as a home remedy for debt—the new loan is secured by some asset, often your home, and this allows you to obtain lower interest rates. Thus consolidation, in the  final analysis, is the conversion of debt that is not secured into debt that is secured by some real asset, in exchange for lower interest rates. It can reduce your monthly payments considerably, and of course that could be very helpful.

It also converts "old" loans into new loans, giving them a new statute of limitations (new life for loans that could be at or near their time of expiring). And it can even turn loans with short statutes of limitations into loans with long ones).

Why Doesn't Debt Consolidation “Work?”


As a pure financial transaction, exchanging a lower interest rate for a security arrangement can be a very reasonable decision. Why then has it been such a disaster for so many people? Risk. Most people entering into complex financing are not able to assess risk and account for it, particularly when they are under economic pressure—which they usually are when they consider debt consolidation loans. Thus people systematically underestimate the risk that they won't be able to make the payments on the new debt.

Additionally, since most people do not really want to go into debt in the first place, the existence of large credit card debt is indicative of other problems, either too little money or a tendency to overspend on unnecessary items. These issues are more likely to be made worse by the sudden reduction of economic pressure and the sudden, apparently greater amount of money or credit available to be spent.

The Hidden Legal Risks of Debt Consolidation

In addition to these “systemic” issues, there are two other main hidden costs of consolidation that should be considered: loss of flexibility, and the nature of secured debt versus unsecured debt.

Consolidated Loans are Less Flexible

When you have ten loans for different things, from automobiles to credit cards, you have flexibility if hard times strike. If you simply cannot make your payments, you can give up some, but not all, of the things you have purchased. You can let some, but not all of the credit cards go into default. This is certainly not a happy thing, of course, but it raises the possibility of individualized debt negotiations, debt forgiveness, or even missed statutes of limitation. Again, these are not the choices and hopes of someone in flush economic conditions, but they are real options facing many people right now. In order for a debt collector to start garnishing your wages, it must find and sue you, must win, and then find your assets. It is an expensive and risky process for the debt collector if you fight. They sometimes drop the ball, and there are limits to how much of your wages can be garnished.

If everything else fails for you, you can declare bankruptcy, where homestead exemptions are likely to allow you to remain in your home.

The Nature of Secured Debt

The bigger risk of debt consolidation loans is the nature of secured, versus unsecured, debt. Remember that what powers the lower payments for consolidation is the existence of security—usually your home. Your home secures the debt, and that means that if you do not make your payments on the new debt, the lender can foreclose on your home and take it away. Foreclosures are generally “expedited” proceedings, meaning that your defenses are limited and the time for asserting them is restricted. In many states foreclosure is not even a judicial proceeding, although you have some legal rights you could assert in certain circumstances.

And what all that means is that instead of facing the prospect of years of battling over high-risk debts and questionable payoffs that could be trumped by bankruptcy, the banks can waltz into court and emerge in a very short time with your house. Put a little differently, your debt consolidation loan could make you homeless almost before you know it. And bankruptcy often, if not usually, will do nothing to protect you from it. 

Anyone considering debt consolidation should think about these risks very carefully. 

Our Products


The Debt Master Series Collection is a series of products designed to take you through the whole "debt-problem cycle.Click here to go to the products page to buy this product. You get our best products for one special price - using them together will get you better results than using any one of them.

When bills begin to add up and start to go unpaid, you will face the hostility of creditors and the threat of litigation. The Debt Negotiation Manual is designed to help with that. It provides you with tools, techniques and tricks to get the attention of the other side in order to get them to negotiate with you. Then you need to use all the power in your situation to get the best possible deal, and then you need to nail it down with agreements that make sure you have accomplished your goals. The Debt Negotiation Manual does all this. Click here for more details on the Debt Negotiation Manual. We have also made a special arrangement with a major provider of prepaid legal services directed towards people with debt issues. Click here to find out more about that.   

If you are sued, you will need something with a more specifically legal focus. Our flagship product, the Debt Defense System is designed to give you everything you need to defend yourself  from the creditors or debt collectors in a lawsuit. This includes forms and samples of documents you might need, a thorough explanation of every step of the litigation process, and materials that will allow you to tend to every part of the litigation process with as little anxiety and as much effectiveness and power as possible. Click here for more details on the Debt Defense System. We also have several products designed for specific parts of litigation, and our members are encouraged to call in with their questions on regular teleconferences or even purchase "time" where we prepare special guides developed more on your specific situation.

And finally, you will want to repair the damage done to your credit. That is what the Credit Repair Manual is for. With this book you get a full explanation of the way the credit reporting business works and what you can do to use the tools at your disposal to accomplish your goals of eliminating or neutralizing bad information on your report and building up good information that will make it possible to restore your credit score and reputation. You will be able to use them on both the credit reporting agencies and the information "furnishers" - the creditors and debt collectors who are reporting you. Click here for more information on this part of the product,

Add Comment:
Added by (optional):
To prevent spam, please tell us:
What is seven added to four?*
1 person will be notified when a comment is added.
Would you like to be notified when a comment is added?
Please login or register first.
Powered by liveSite Get your free site!