There are tons of affiliate websites shopping debt consolidation loans for consumers with bad credit. However, a debt consolidation loan makes little sense for those whose credit has already taken a hit, unless they have significant assets. Read on to learn why.

Table of Contents
  1. Debt consolidation and bad credit
  2. The biggest obstacle to bankruptcy has been lifted
  3. Debt consolidation is fueled by affiliate commissions

Article at a Glance

  • Most articles written about debt consolidation for consumers with bad credit are designed to sell debt consolidation loans and earn affiliate commissions.
  • Many of these loans have hidden fees, and it’s possible you could end up in more debt, with a worse interest rate.
  • When credit has already been ruined, and if your household doesn’t own many assets, chapter 7 bankruptcy is a more effective tool than debt consolidation

In a debt consolidation loan, you trade multiple debts for just one debt.

The biggest benefit of taking out a debt consolidation loan is the ability to pay off high interest rate debt in exchange for a better interest rate, and just one simplified monthly payment.

However, especially for those with bad credit, there is no guarantee that the new loan you take out to “consolidate” debt will be at a lower interest rate, and many lenders charge origination fees, which get tacked on to the principal balance.

As such, you may end up deeper in debt with debt consolidation than when you started. In fact, the Consumer Financial Protection Bureau website warns specifically about consolidation loans for those with bad credit.

The loans you take out to consolidate your debt may end up costing you more in fees and rising interest rates than if you had just paid your previous debt payments. And, if problems with debt have affected your credit score, you probably won’t be able to get low interest rates on the balance transfer, debt consolidation loan, or home equity loan.

Consumer financial protection bureau website

If America’s most trusted financial protection agency is warning against debt consolidation for those with bad credit, why are so many on the internet recommending it?

Debt consolidation and bad credit

Many consumers arrive at debt consolidation after falling behind on their debts. The further they fall behind, the more dings their credit score takes.

If you’re banging your head against the wall worrying about getting a debt consolidation loan, ask yourself this: what will debt consolidation really do for you?

If you don’t have the cash to pay your current bills, it’s unlikely debt consolidation will be an easier lift every month, even with a lower interest rate.

Although making payments on time could help your credit, that assumes a perfect track record of on-time payments, and your debt-to-income ratio will prevent a complete healing of your credit score any time soon.

The biggest obstacle to bankruptcy has been lifted

Ruining a credit score is one of the big reasons people don’t want to file bankruptcy.

But what if your credit is already bad?

Filing bankruptcy under these circumstances will improve your debt to income ratio by wiping out all of your debts, and giving the chance for a true fresh start.

The Consumer Financial Protection Bureau has this to say about the importance of bankruptcy relief:

The United States Bankruptcy Code provides important relief for debt-burdened consumers who need a fresh start to get their finances in order.

Consumer financial protection BUREAU website

When a consumer’s credit is already low, filing bankruptcy won’t do much additional harm, but unlike debt consolidation, it will wipe out the debt burden for good.

Debt consolidation is fueled by affiliate commissions

The reason people don’t read as much about chapter 7 as an alternative to debt consolidation for those in financial trouble is because there aren’t affiliate commissions to be earned.

Sites like Nerd Wallet, and others, funnel readers to financial companies that pay hundreds of dollars per referral. This casts doubt on the credibility of sites like these.

We aren’t here to sell bankruptcy.

It might not be the best option.

For people with large amounts of debt, and valuable, non-exempt assets, It is important to speak with a qualified bankruptcy lawyer to ensure that all of your assets can be protected through the bankruptcy process.

Financial experts like Dave Ramsey don’t recommend bankruptcy, it’s not a process devoid of stress.

However, if your credit is already in the tank, a chapter 7 is worth considering alongside debt consolidation.

Walter Metzen

Walter Metzen is a Board Certified Specialist in Consumer Bankruptcy with over 28 years of experience. He’s represented more than 20,000 bankruptcy clients in and around Detroit where his firm is located. View his profile here.
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