Consumer debt is on the rise in America. With the average family receiving dozens of credit card offers each month, household debt is skyrocketing and has become overwhelming for many Americans.
According to the Federal Reserve, consumer debt in America rose to $4 trillion and continues to grow at about 5% a year. For many individuals and households, outstanding consumer debt has put them in a precarious situation that seems impossible to get out of.
Is Bankruptcy the Answer?
Many struggling households are faced with overwhelming debt, interest payments that are quickly eclipsing what they initially spent in principal, and they are falling behind on their payments at an ever-increasing pace. For many Americans who are in debt trouble, bankruptcy looks like an enticing option.
Bankruptcy was an innovation of the 19th Century designed to protect debtors from life-altering debts. It’s provided the ecosystem for people to take financial risks without the fear of ruining their lives forever.
Prior to the 19th Century, debtors who fell behind were sent to debtor’s prison. Obviously, the likelihood of someone being able to get out of debt while in prison was unlikely. Most of the time, it was impossible. That is why bankruptcy laws were passed, to begin with.
Now that bankruptcy is an option, many have looked to it to get them out of their financial jam. But it’s fraught with negative impacts that will last for years.
For one, you can lose assets and other property. In most cases, you can keep your primary residence, i.e. the house you currently live in, but you’ll lose just about everything else.
In addition, it’ll leave a stain on your credit report that will last for a decade. That can keep you from getting other loans, credit cards, refinancing, and can even keep you from getting a job or starting a business in the future.
Although bankruptcy is certainly better than debtors’ prison or even paying creditors for the rest of your life, there may be better options to consider.
What is Debt Consolidation?
One of the best options to consider before filing for bankruptcy is debt consolidation. This is where a financing company like Hornet Partners will refinance all of your outstanding loans.
Let’s say you have 3 credit cards with a total $50,000 balance at 20% APR, 2 car loans totaling $50,0000 at 9% interest rate and a line of credit with a $50,000 balance at the bank at 15%. The total debt is $150,000, all with fairly high interest rates.
This doesn’t include annual fees, late charges and everything else that adds up over time.
In this scenario, experts at a debt consolidation company like Hornet Partners, will first of all offer credit counseling. They’ll look at your current financial situation and advise on your next steps.
Then, if it makes sense for you, they will offer a debt consolidation package. This is where they will pay your $150,000 balance to your creditors. Then you will owe the debt consolidation company the $150,000.
Well, it sounds like just transferring balances to another creditor, right? No, there are many benefits to this approach.
Lower Interest Rate
The most significant benefit is lower interest rates. What interest rate you ultimately end up getting with the debt consolidation company will depend on various factors. It is likely, however, that the interest rate won’t be 20% APR like many credit cards.
In most cases, the debt consolidation company will be able to offer you a significantly lower interest rate. Most people can’t keep up with fast inflating minimum payments, mostly caused by runaway interest rates.
Many individuals find themselves with ever-increasing monthly payments when they’ve stopped using the credit card altogether. That is due to the high interest rates that most consumer lenders charge.
Longer Payment Terms
Another benefit to debt consolidation is that it may lengthen your payment terms. Instead of having to pay back a loan in 3 years, you may now be given 7 years. By stretching out the loan payment terms, you’ll have more time to pay down the balance.
More importantly, it also has the effect of reducing your monthly debt payments, which we’ll discuss in more detail later.
Fewer Fees and Charges
One of the unintended expenses for many credit cards and other consumer loans are fees and other charges. This is especially the case if you’re behind on your payments.
The common fees that everyone pays are the annual fee and the finance charge. If you have a travel rewards or cash rewards card, the annual fees tend to be higher. The finance charge is essentially the interest payment.
The charges that can run away from you if you’re struggling financially are the late fees, over the limit charges and returned payment fee. If you’re behind on payments and bouncing checks, the fees can rack up quickly. There are times people are paying just as much in fees and late charges as they are in interest payments.
If you’re playing credit card musical chairs by transferring your balance around to new cards, the transfer fees can add up too. Transfer fees can be as high as 3-5% of the balance. That means if you’re trying to transfer $25,000 with a 5% fee, you can be paying $1,250 just to move balances around.
The various fees from multiple creditors can add up to a significant amount in extra financing costs. It’s usually not something most people are aware of until it catches up to them.
If you consolidate all of your debt into one loan, you will most likely reduce the number of fees and charges that you have. In addition, charges tend to rack up because people can’t keep track of all of them. Having just one credit will reduce the number of fees and charges that you have to monitor.
Lower Monthly Payment
The combination of lower interest rates and longer payment period can equate to lower monthly payments. This is probably the most beneficial part of working with a debt consolidation company like Hornet Partners.
Although the total finance charge over time may be higher, it can be an incredible help to the cash flow situation of struggling families in the short term. More cash every month can have a significant psychological, emotional and strategic impact on your life.
This short-term relief can enable a household to get back on their feet financially. By stopping the hemorrhaging of cash flow, the family can begin to budget and plan their way out of financial pain.
The advisors at Hornet Partners can help come up with a plan to lower monthly payments and provide a roadmap to financial freedom and becoming debt free. Cash is king and the short-term relief to your cash flow could be the thing you need to get you on the road to financial health.
One of the main psychological blocks for many people struggling with their finances is seeing the bills pile up on their desk. Many struggling families report they don’t even open their mail anymore because the number of bills they have to pay and juggle is simply overwhelming.
This mental barrier can be a significant hindrance to individuals not fixing their financial situation. The unfortunate reality is that debt can cause emotional distress, which can lead to more debt and more distress. It’s a dangerous cycle that can ultimately lead to bankruptcy.
Having advisors like Hornet Partners that work with you to create a plan and lower monthly payments to a reasonable level can be the support that someone needs to start taking the steps necessary to achieve financial freedom.
Probably the most significant psychological benefit to working with a debt consolidation company is that it reduces the number of bills you get in the mail. Instead of paying 5 creditors and figuring out which one gets paid late each and every month, you have only one bill to pay.
For someone who may have never experienced the overwhelming feeling of a stack of bills and having to do the math to figure out which one to not pay, it may be hard to understand the enormous relief of having just one company to deal with.
Decision fatigue is something that disproportionately affects those under financial pressure. Having to juggle multiple creditors creates a level of decision fatigue that can impact every other area of your life.
And instead of spending your time and energy on sorting through bills, fielding collections calls and feeling hopeless, you can now spend it on figuring out how to get out of the situation. You can take that energy and create a side income, take a second part-time job or sell items in your home that you don’t need or don’t want.
Debt Consolidation Consideration
For those facing down the prospects of bankruptcy, debt consolidation can be a great option that will reduce your monthly payments, save your credit and get you back on your financial feet.