Debt consolidation

Helene Mueller
eCollect support team

Debt consolidation is a financial definition for the process of unification of various debts into one single and larger amount. Combining such monetary obligations usually economises the total sum of interest rates and can even lower the monthly instalment percentage. This financial service aims to help people, who are having difficulties in managing their debts (usually more than one) and more specifically handling their monthly payments. These difficulties are most often due to the inability of the consumer to control his income and the difference between expenses and monthly wage. Consolidation services can be carried out by different agencies, such as credit card companies, specialised debt management agencies, banks, mortgage lending companies, even by standard DCAs (Debt Collection Agencies), representing the lender. In the last case, the debt consolidation can be considered as part of the debt collection process and the recovery agency might not charge the debtor at all for this service, as such repayment option is usually additionally charged when provided by a private company.

Debt consolidation specifics

Generally, the consolidation loan’s schemes are characterised by lower interest rates, therefore lower monthly payment taxes, but become more long-termed. Such repayment option can be applicable to both individual debtors and business borrowers. The service involves borrowing one larger debt to cover all smaller ones. The old defaults are typically unsecured debts, meaning they are not followed by any collateral. The debt taken after the consolidation is usually a secured one, but depending on the creditor, there is an option for lending an unsecured debt. Most lenders prefer to grant the last amount as a secured loan, as such amounts are always followed by a collateral as a guarantee, in case the consumer falls behind with his payments again. A secured collateral is usually a mortgage or a car loan, pledging a real estate or another form of high-quality tangible property of the borrower. If the consumer falls behind with the loan borrowed as a result of the debt consolidation, the creditor is legally authorised to pledge the assets, marked as the secured loan’s collateral. Secured debts can be beneficial for the consumer as well, because the higher the monetary value appraisement of the item, the lower is the total interest percentage of the new debt. As long as the second party (consumer) does not drop behind with his regular loan payments, he will benefit from this mutual arrangement.

Most often debt consolidation is used for merge of credit card debts and education debts, as they are the most commonly encountered default payments. In U.S. student debts can be consolidated only by federal departments, as in all U.S. stated the education debts are considered as government monetary obligations, therefore they are not connected with the private sector.

Debt consolidation’s positives & negatives

As every type of debt clearance, debt consolidation has its pros and cons as well. When signing an official contract for a consolidation loan, the consumer will have only one creditor to cope with and pay to. But when agreeing to such repayment plan, a debtor will be most likely asked to stop using his credit cards, in order increase of his overall credit debt to be avoided.

As the consolidation process is connected with signing an agreement for secured debt, the consumer will have to guarantee this new amount with a collateral like his apartment or another type of real estate. If this collateral is highly evaluated, this will result in a lower monthly interest rate. But if the consumer falls behind with the new secured debt’s payments his property (or the material item, marked as a collateral) can be forcefully seized with a court order.

When choosing consolidation for debts, the consumer will have more time for disbursement. But the smaller the amount is and the longer the repayment period is, the higher gets the total monetary sum of the whole debt. Furthermore, the payments, which have to be paid per month, are fixed and not flexible, meaning the debtor cannot transfer only minimum amounts, but the full monthly sum negotiated prior to the formation of the contract.

Debt consolidation can also be implemented my borrowing unsecured debt, which can be beneficial for the consumer- debtor’s property will not be at risk when using an unsecured loan for the consolidation of debt. The negative feature is that this option is possible if a very good credit report is available. The grant of an unsecured debt is based and depends on consumer’s credit score and monthly wage income. Other cons are that when a consumer chooses unsecured debt consolidation, he either might not qualify (because of sterling credit lack) and also the interest percentage for monthly payments will be palpably higher.

The limitation period in the UK is determined by the Limitation Act 1980 (
) and is exactly 6 years. According to the Act, if the creditor hasn’t required a debt settlement within these 6 years, and hasn’t contacted the debtor in any way, the debt is considered as invalid and the case is ceased. After these six years, the creditor cannot start legal proceedings; the debt is named as “time-barred”; and the late period falls under the legal term “laches”, which refers to an inconsistent delay in pursuing the right to claim settlement of a debt amount. Such late attempts occur mostly when the default amount has been sold to a debt buyer or from one debt collection agency to another.

The Limitation Act also consists of a part, where personal injuries, defective products, or life-fatal accidents, etc. are considered as exceptions and may not comply with the Act. Such cases can be prolonged up to 3 more years on top of the original 6-years limitation period.

According to the Limitation Act 1980, there are some debts, which have no valid statute of limitation and cannot be collected by debt recovery agents. Such are the debts, deriving from unpaid taxes, healthcare and medical bills, student loans, unpaid child support taxes, etc., as all fall under the term government debts. They are reported straight to the UK credit bureau and are not collected by DCAs (Debt Collection Agencies), but by the government. Usually, the collection methods for such default amounts are either tax refund interception or wage garnishment (according to UK law, it cannot exceed 25% of debtor’s net monthly wage; but it can depend on the area of living and amount of monthly wage).

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