John E. Pytte March 14, 2016

DebtMany people assume, often inaccurately, that high levels of debt can only be overcome by paying it off or filing bankruptcy. The truth is there is a middle ground, and it can provide someone who has not yet passed the point of no return with a variety of alternatives, some of which may be far less expensive both financially and emotionally.

So, what is consolidation and how does debt consolidation work?

The Basic Process

Consolidating a debt involves at least three parties. The debtor is the person who owes the debt. The guarantor is the person who consolidates the debt, and the creditor is the person who loaned money to the debtor in the first place.

Let's say for example, a creditor loans money to a debtor three times: once for $1, once for $5, and once for $100. By the time all three loans are made, the debtor owes a total of $106 and begins making payments. The problem is the creditor is charging 20% interest annually, so a little more than $20 of every year's payments is not being applied to the principal (the amount you owe on your loan, not including interest).

The debtor doesn't have enough money to pay off all three loans, but the guarantor does. So the guarantor offers a "consolidation" to the debtor. The guarantor will pay off all three loans, satisfying the creditor's terms. Then the guarantor will write a single loan for the debtor for the entire total and set a new interest rate of 10%.

The guarantor is said to have "consolidated" all of the debtor's loans.

Why is Consolidation a Good Idea?

Answering the question "what is consolidation?" is only the first step. Owing money to many different creditors can be not only stressful, but counterproductive. Your goal is of course to pay off all your loans so that you no longer have to damage your credit, face foreclosure, or be continuously hounded for payments.

Consolidated debt can also be less expensive. Consider all the late fees, interest, and other fees you might pay on each loan you have. Paying fees for each of your separate loans can add up very quickly. Consolidating your debt simplifies your finances and can help you develop a more manageable structure by only having to deal with one loan.


What many people concentrate on when they think about bankruptcy is the damage to their credit and the often mistaken belief they must liquidate everything they own and completely start over. The reality is that any individual can file for Chapter 13 bankruptcy and obtain both the time and the orderly processes of a federal court to reorganize their finances and possibly negotiate some relief, lower interest and even, in some cases, outright forgiveness of some of their debts.

Advantages of Bankruptcy

One of the key legal features of a bankruptcy filing is the automatic stay that is placed on litigation. If you are facing small claims actions, foreclosures, or other disputes with creditors, filing for bankruptcy brings all legal action against you to a federally mandated halt. No further action can be taken against you or your assets without court approval. This can often be all the time you need to come up with a better plan. For this reason, having a qualified and experienced bankruptcy attorney on your side is often a good idea even if you don't plan to immediately file for bankruptcy protection.

If you are worried enough about your debts that the issue begins to interfere with other parts of your life, you are likely in need of professional counsel. We encourage you to contact us at Georgia Debt Relief for a free consultation. You may find it is easier than you think to make progress and overcome your financial problems.