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Debt Restructuring May Help You Avoid Bankruptcy – But Could Be a Sign of Larger Problems – But Could Be a Sign of Larger Proble

Blogs from October, 2013

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We sometimes hear from clients who ask whether it makes sense to take out a personal loan in order to pay off credit cards or medical bills or some other pressing debt.

Scissors cutting credit cards

The first point our bankruptcy lawyers in Woodland Hills want to point out is that this is not “paying off” debt. Rather‚ it’s a form of restructuring it‚ and there are times when it makes smart financial sense to do so. However‚ there are other times when such actions are a signal that you need to begin exploring a more serious debt solution.

We recognize that often for reasons beyond our clients’ control‚ credit card debts can quickly become unmanageable. It’s possible that a person might be able to wrangle them in by taking out a personal loan and transferring the debt from the card to the loan. This assumes that your credit score is decent enough to secure the loan to begin with.

Usually‚ the reasons why you might consider such a move would be that you would have the potential to lower your monthly payment‚ usually by securing a lower interest rate. Be wary‚ though‚ because often‚ personal loans have a set deadline by which they need to be paid‚ while a credit card does not. That means that your minimum monthly payments could actually be increased if you have the balance transferred to a personal loan‚ as opposed to keeping it on a credit card.

That said‚ if you find yourself routinely using one card to pay another or using repeated balance transfers as a way to help you stay afloat financially‚ it’s probably time to take a step back and reevaluate your approach.

Another issue you want to be aware of with balance transfers from one credit card to another is that many credit card companies will try to lure you in with too-good-to-be-true introductory rates. If you can pay the debt off – or at least down significantly – during the introductory term – great. Most people can’t. The end result is that they are worse off than when they started. Plus‚ the terms of those transfers may be such that if you are late on even one payment‚ your rate could automatically go up far sooner than expected.

Some people opt instead to try to solve their debt woes by taking out a home equity loan or borrowing against their retirement. This often backfires too because they later find they still can’t cover the payments and then they have few alternatives but to file for bankruptcy anyway.

The reality is‚ trying to borrow your way out of debt is not going to work‚ and you may simply be putting off the inevitable.

Consider that your retirement savings and sometimes even your house can be protected in bankruptcy. However‚ if you’ve drained your home equity and/or your retirement savings before filing‚ you may lose those assets completely.

So again‚ there may be cases in which it makes sense to initiate balance transfers and restructure debt. Just be sure that when you do so‚ you aren’t ruling out debt solutions that may be better tailored to your situation.

If you are contemplating filing for Chapter 7 bankruptcy in Woodland Hills‚ contact Cal West Law to schedule your free consultation. Call (818) 446-1334

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