Debt Consolidation Program Nightmares

Debt consolidation programs can seem like a dream come true for individuals struggling to get caught up on their debt. There is a saying that if it seems to be good to be true, it probably is, and this holds true in the world of debt consolidation. Debt consolidations programs don’t eliminate your debt, but simply move it around. Furthermore, these programs fail to change the behavior that began the debt in the first place.

Debt consolidation programs typically involve taking out a large loan to pay off several smaller ones, but even if you get a lower interest rate, you most likely will pay for a longer period of time which means you end up paying out more money in the long run. A second pitfall with these types of loans could be a further reduction in your credit score if anything goes amiss. Ramifications could even include the loss of your home if you pledge it as collateral in the form of a second mortgage and then fall behind on your payments.

While not all experiences with debt consolidation are bad, these stories are designed to help you remember that is very important with whom you trust to manage your debt and finances for you. In this article we’ll look at some potential pitfalls closer through individual stories of those who suffered from “Debt consolidation program nightmares”.

A married couple of 23 years had acquired a good deal of credit card debt, built up over the years through emergencies and a stint of unemployment (around $60,000 spread over 9 different credit cards). Since the couple were not behind on their minimum credit card payments and didn’t feel they needed to consider bankruptcy, they sought out the help of a debt consolidation company to help them get ahead of the debt. They sought out a company they thought was listed by the NFCC (later they would find out the company was not) and the BBB (had just recently obtained a listing with no history at the time). The initial phone contact was great; the company collected the debt information, and let them know they would call back with a couple of options: 1 for consolidation and 1 for a debt settlement. Then things changed, with “blood in the water” the counselor called back and was very pushy about when the couple could start. The couple asked for the entire contract in writing (very smart). Reluctantly, the debt consolidation counselor did so and after reviewing it, several red flags were caught: 1. the company’s upfront fee was equal to an entire first month’s payment (around $800); 2. The company’s fee was $50 a month after that; 3. The couple would have to stop paying all debts immediately so that they would fall into arrears before the debt Consolidation Company would start negotiating a settlement; 4. The company wouldn’t start sending out any payments until the couple had paid $3000 into a non-interest bearing account (4 months in arrears before any payment to creditors!). Luckily, the couple saw the light and declined the offer from the company, but many individuals end up taking these types of unfair deals out of desperation every year.

Our second story involves an individual who, along with his wife, had racked up considerable student loan and credit card debt. Because they were both rising professionals making their monthly payments, they sought out loan consolidation as a way to lower their interest rate and clear up some of their credit balances in order to qualify for financing for a new home. They signed up for the services of a national debt consolidation company, and immediately started getting calls from creditors about delinquencies. In the calls from creditors, some had received faxed settlement proposals and some had not. Some creditors had agreed to the proposals and some had not. The couple discovered that the debt consolidation company would send faxes to as many creditors as they could (some creditors were left out), and whether or not the proposal was accepted, the company started sending in the proposed payment amount. The couple had so many troubles with the consolidation company not accepting any responsibility and not changing their tactics, that they had to take matters into their own hands, contact the creditors themselves and bypass the consolidation company all together, which is something they could have done on their own in the first place. The damage to this couple’s credit history had already been done, however, through multiple late payments or charged off accounts. The couple’s dream of owning a home are now pushed back for the next 4 to 7 years and they consider their dealings with the debt consolidation company the worse thing they could have done for their financial future.

Our final story comes from a situation of outright fraud and lies. A woman was contacted via a phone call from a debt management company and was told that for a initial fee of $499, the company would negotiate a lower interest rate with her creditor, and help her pay of her car loan, mortgage, and credit card bills much faster than on her own. In all, she was told by the company that they would save her $2,500 in a short time. After paying the initial fee and being guaranteed that she would see lower interest rates in 30 days, it turns out that this was not the case and the consolidation company was unable to lower any of the rates on her credit cards. Furthermore, the company refused to refund the initial money as promised.
As previously mentioned, if an offer sounds too good to be true, it most likely is. If a company offers to reduce your principle by 50 to 70%, you can rest assured that there is no possible way to do this under any circumstances.

If you’re going to go the debt reduction route alone, the only true way you get out of debt is by changing your habits. This means having a financial plan and budget and sticking to it month in and month out. It might include things like getting a second part time job for few months to get caught up, not taking on any new credit under any circumstances, and living on less money than you make. It also never hurts to explore your options before making a final decision.

If you are drowning in debt, luckily there are other options to explore. IF you do decide that you want to find a debt consolidation program, start at your local credit union or with banks that you already have relationship with. Alternatively, a legitimate credit counselor, can help you with an objective assessment of your financial situation, just keep in mind that they can’t offer you legal advice. Lastly, and probably your safest option, is to have a free consolation with an experience bankruptcy attorney in California. These individuals know the law, and just as important, have experience relieving individual’s debt through federal and California bankruptcy laws. They can help steer you in the right direction, even if bankruptcy is not the right option for your particular circumstances.