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Debt consolidation is not a silver bullet

While many in Ohio worry about finances from time to time, some people are really struggling with monthly bills and get behind. Maybe it is credit card payments sneaking up, or for others medical bills have made their financial situation unbearable. If this sounds familiar, debt consolidation may sound like a welcome solution.

As USA Today reports, debt consolidation companies, which promise to convince creditors to take less money than they are owed in an effort to help people settle their debts, can be predatory. Consolidation loans from reputable sources, on the other hand, can be very helpful for people who have found themselves in an unmanageable amount of debt but are able to stop spending and stick to a budget. However, for those who cannot commit to a budget or are unable to save, these loans may be difficult to repay. For people who are not able to repay their debts in a three to five-year range, a debt consolidation loan should look into debt counselling or consult with a bankruptcy lawyer. It is also important to note that all debt, such as student loans, is not typically eligible to be disposed of in bankruptcy.

There are several types of personal bankruptcy, as FindLaw explains, and Chapter 7 or Chapter 13 are the most commonly used to get rid of debt. Chapter 7 is typically used for people of very little means, and there is a "means test" to decide if someone makes too much money to qualify for this kind of bankruptcy. A person's assets are sold to repay creditors, but unsecured creditors, such as credit card companies or medical establishments, receive very little. This is also called "liquidation," which means assets are sold, but the debt is also gone.

Chapter 13, on the other hand, is for people who do get a regular paycheck and who want to keep some of their assets, like the family home or a vehicle. In these cases a payment plan is worked out based on a person's projected income. The court has to approve the plan, and the debt is not immediately erased. 

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