Debt consolidation is the process of combining several loans into one loan, often with lower interest and a lower monthly payment, and is sometimes used by financially overwhelmed debtors. The moral obligation to repay debts is assumed in laws dating back to the Code of Hammurabi, written in 1,700 BC. In this code, provision is made for families who could not repay their debts to work for their creditor until the debt was paid. On the other hand, interest is usually a big factor in today's debt, and the Bible forbade charging any interest on money loaned to the poor.
Ethics of Partial Payment
Franklin Debt Relief points out that if a consumer is truly so overextended that repayment is impossible, than any plan that repays some of the debt is an honorable alternative, since both debtor and creditor benefit. Many creditors are not sure they are in this desperate a situation, however. Some debtors who calculate the actual cost of repaying a debt with interest are shocked by the total amount they will pay and wish to renegotiate the terms.
Ethical Viewpoints
The morality of any given action must be determined by the person considering the action, but according to Franklin, there are three schools of thought on the ethics of debt consolidation. One view is that the credit card companies use deceptive and aggressive practices to trap consumers into high interest that makes repayment nearly impossible, so the blame for inability to repay falls on the credit card company. Another view is that a debtor should bite the bullet and pay back the debt at the terms in the original agreement.
Mitigating Circumstances
A third view is that mitigating circumstances should be considered. Each debt situation is different, and unexpected hardships can occur that change the ethical equation. For example, an accident, sickness, or losing a job through no fault of the worker can throw a debtor into a financial crisis. In this case, debt consolidation or negotiation may be the only option available.
Ethics and Spending Habits
Dave Ramsey, Christian author and radio show host, specializes in personal financial advice. According to Ramsey, while debt consolidation is tempting for those feeling overwhelmed by debt, it is not very effective. Ramsey states that 78 percent of those who complete debt consolidation find themselves in debt again. Instead, Ramsey advises creating a plan to pay off debts and to pay cash for purchases, or not buy at all. Ramsey considers debt to be a symptom of a deeper problem --- failure to live within the family income.
Ethical Credit Counseling Agencies
According to the Federal Trade Commission (FCC), consumers should also beware of the ethics of the credit counseling agency they contact. The FCC lists guidelines for getting out of debt and choosing a credit counseling agency on its website.
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