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When debt consolidation is not a solution

Michigan consumers who are struggling with certain financial obligations might consider a debt consolidation loan. While this might appear to be a way to get control of debt and lower monthly payments, it might not be a long-term solution because if a person has a spending problem, it does not address that.

One man took out a debt consolidation loan because he hoped to avoid filing for bankruptcy a second time. The $17,000 loan from his credit union, which he was to pay back over five years, paid off ten credit cards. With an 8 percent interest rate and a monthly payment of $375, his terms were better than they had been with the cards. Still, as he also began helping to support his daughter, a single mother, he found himself struggling again. He took out a payday loan to help her, but she lost her job. The $5,000 tax refund she intended to use to pay him back went to support her children.

However, the man says that even these hardships were not ultimately responsible for his debt. He said that more than half of it was the result of careless spending. He eventually filed for Chapter 13 bankruptcy with a plan to pay creditors back over five years and changed his spending habits.

People may also need to file for bankruptcy for a myriad of reasons that are unrelated to careless spending. For example, a person might lose a job, have an accident or become ill. Bankruptcy can stop creditor harassment and give a person a new financial start. Chapter 7 bankruptcy allows a person to keep exempt assets and discharge most unsecured debts. Chapter 13 is more of a restructuring procedure. An attorney can outline the eligibility requirements of each.