How Does Debt Consolidation Work?

When someone feels overwhelmed with credit card debt, they will often turn to creative solutions other than bankruptcy to address the problem. One common tactic is to consolidate the debt into one payment. This could be accomplished in different ways, including employing a debt consolidation agency or applying for a consolidation loan. Each of these options have their advantages and disadvantages. However, depending on your circumstances, filing for bankruptcy might be your best option.

Conceptually, debt consolidation makes sense. You can save money by grouping your debt into one monthly payment, potentially lowering your interest rate. Sometimes, you might negotiate a lower rate with your creditors. However, in practice, this rarely works smoothly and there are some hidden problems. On the other hand, bankruptcy provides many benefits and legal protections not available to those seeking to consolidate their debts.

Our experienced Philadelphia bankruptcy attorneys at Young, Marr & Associates know that bankruptcy is not for everyone. However, while debt consolidation sounds enticing, there are many situations where filing for bankruptcy is a better option. Before applying for a debt consolidation loan or hiring a debt consolidation agency, take advantage of our free consultations by calling (215) 701-6519 in Pennsylvania or (609) 755-3115 if you are in New Jersey.

Types of Debt Consolidation

Debt consolidation is a financial strategy to reduce the interest rate and the total monthly payment on credit card bills. It is typically accomplished by grouping all your outstanding debt under one loan, thus consolidating your payments into one monthly payment. There are several ways to accomplish this. The method you choose will often depend on the amount of debt and your credit score.

Consolidation Loan

You could apply for a consolidation loan from a bank, credit union, or other financial institution. Typically, a person will apply for a personal loan to pay their outstanding credit card debt. The advantage of this method is obtaining a significantly lower interest rate, lowering the monthly payment. However, there are usually fees involved and, if you are a homeowner, the bank might require securing the loan with your property. Additionally, to be approved for a consolidation loan, you will need a relatively high credit score. If your credit score is average or below average, you might not receive a much better interest rate than your credit cards.

Debt Consolidation Companies

Another alternative is using a debt consolidation company. These companies will work directly with your creditors to reach an agreement on either a lower interest rate or total balance. While your creditor does not have to agree, these companies have the advantage of having multiple debtors under contract. One disadvantage is that many consolidation companies charge additional service fees. It is not uncommon for these fees to surpass any negotiated savings. You should review any agreement with our seasoned Pennsylvania bankruptcy attorneys to determine if bankruptcy is more cost-effective.


You could work with each of your creditors individually, attempting to lower the interest rate or your total balance. However, if you have been making minimum payments every month, a creditor is unlikely to entertain lowering your payment.

Bankruptcy Versus Debt Consolidation

Individuals and couples overwhelmed with credit card debt could benefit from filing for bankruptcy. Depending on their circumstances, people will either file Chapter 7 or Chapter 13. In Chapter 7, a debtor will discharge their unsecured debt in a matter of a few months. While there is the potential of having to turn over personal property to satisfy your debts, in nearly every situation, you will be able to protect your assets through the available bankruptcy exemptions. Our Philadelphia Chapter 7 bankruptcy lawyers are available to answer any question you might have.

A Chapter 13 bankruptcy differs in that you will be required to pay back all, or a portion, of your debt over five years. While Chapter 13 does not appear as advantageous as Chapter 7, it is designed for individuals who have the ability to pay their debts. The benefit is that the amount paid is based on a calculation and not negotiated. Therefore, if the numbers are in your favor, you could pay substantially less than you owe. Our Philadelphia Chapter 13 bankruptcy attorneys will carefully review your income to determine your monthly payment.

As discussed above, debt consolidation companies often charge additional fees on top of the debt you must pay back. If you qualify for Chapter 7, you could eliminate all of the debt without having to pay a penny to your creditors. Additionally, the attorneys’ fees are often significantly lower than what you would be required to pay over the length of your payment plan with a consolidation agency.

Likewise, if you must file a Chapter 13 bankruptcy, you could be required to pay less than the full amount you owe. Before agreeing to work with a debt consolidation agency, it is a good idea to review your situation with our Pennsylvania bankruptcy attorneys.

Another advantage to filing for bankruptcy is there are no tax implications when your debt is discharged. If you or a debt consolidation agency negotiate a reduction in the total amount owed, you could owe federal income tax on the forgiven debt. When your debt is discharged, you are not required to include it as income for tax purposes.

Contact Our Pennsylvania Bankruptcy Attorneys Before Consolidating Debt

There are times when the best option available is consolidating your debt into a single payment. However, before going down that path, you should discuss your situation with our Bucks County bankruptcy attorneys. There are advantages and benefits to filing for bankruptcy. At Young, Marr & Associates, we believe everyone should understand their options. Bankruptcy is not always the right decision. However, without taking the time to understand the process, it is impossible to make an informed decision. Call (215) 701-6519 in Pennsylvania or (609) 755-3115 in New Jersey to review your unique situation.