When I first started writing these blogs, I was asked to consider writing a blog on why debt consolidation could help people with financial problems. I can not do that. I have been advising clients for 30 years on how to fix their financial problems and I think debt consolidation is one of the biggest scams facing American consumers today. Let me tell you why.
It Rarely Works
If you owe five creditors $2,000.00 a piece, you owe $10,000.00. Consolidating that debt means that you still owe $10,000.00, you just owe it to one company, instead of five. After you have paid the first five creditors in full with the debt consolidation loan, those original five creditors will offer to extend you more credit. In these tough financial times, you need money to support your family and so you go into debt again with the very creditors whose debt you “consolidated”. The cycle continues and continues until your debt becomes insurmountable.
Watch out for the Scams
There have been many, many firms who make big “debt consolidation” promises, but who are really a scam. Many, many of my clients tell me that they paid thousands of dollars to debt consolidation firms and never got any relief from their debt. Debt consolidators and credit counselors are not regulated or licensed. They are many times owned by the credit card industry who makes more money when you incur debt, and then incur more debt in an attempt to get out of debt. Many of these companies promise that you can pay them a sum of money each month, and they will accumulate that money and then use it as a “pot” to settle with your creditors. Well, none of that money is refundable. If your creditors will not take the “deal” offered with your pot of money, the debt consolidation company keeps the money. Additionally, how do you think the debt consolidator is getting paid? They are paid from your money. Ouch!
It Hurts your Credit
If you go to a credit counselor and then pay your creditors through a debt consolidation loan, that counselor will report to the credit bureaus that your debt is being paid through a credit counseling agency. Guess what, that hurts your credit! So you went to a credit counselor to help save you credit, and they report to the credit bureaus that you are paying through them and that hurts your credit! I can’t tell you how many times clients have told me this happened to them.
They Can’t Give you Legal Advice
When you have a debt problem, you typically also have legal problems. A credit counselor is not an attorney and can not give you legal advice. Credit counselors are almost always established and paid for by the credit card industry. So, you are getting advice from the people that you owe money to. Their job description is to find a way to have you pay your unsecured debt in full, with interest. They can not help you with a foreclosure, a lawsuit, stop a garnishment, discharge any debt….they are just there to find a way to get the people who are paying their salary get paid in full.
I’ve been advising clients with financial problems for 30 years and I have never once seen a case where I thought a debt consolidation loan was the answer to a client’s problem. People who can pay their debt, pay their debt. People who can not pay their debt should seek legal advice from a reputable bankruptcy attorney.