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Loan consolidation and consumer bankruptcy

Many adults carry student loan debt well into their post-college lives. For some, this obligation, combined with other expenses, creates a serious financial strain. Those looking for debt relief have a number of options, including consumer bankruptcy and loan consolidation. The two approaches are not mutually exclusive, although many Maryland residents hold that misconception.

When considering loan consolidation, it is helpful to have an idea of how that process works. Essentially, a borrower takes on a new loan that is used to pay off all smaller student loans. The end result is one simple payment, which can make monthly budgeting and bill paying easier. In addition, having only one payment reduces the amount of late fees that can build up if a financial crunch causes a borrower to be late on a payment in any given month.

On the downside, many people who consolidate their student loans do so with the intention of lowering their monthly debt service payments. While the payment amount might be reduced, the repayment term will lengthen. The end result can be a far higher overall cost than if the borrower had repaid the multiple smaller loans over a shorter period of time.

Fortunately, distressed consumers in Maryland and elsewhere can pursue both loan consolidation and consumer bankruptcy at the same time. While most student loan debt cannot be discharged during bankruptcy, many other forms of debt can. In the end, eliminating other consumer debt accounts and attaining a lower monthly payment obligation through loan consolidation can make it easier for borrowers to have more financial breathing room.  

Source: Fox Business, "The Pros & Cons of Consolidating Your Student Loans", AJ Smith, Nov. 17, 2015

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