What happens when debt consolidation goes wrong
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How Debt Consolidation Can Go wrong
By Liz Weston, CFP(r) Senior Writer | Personal finance economics, credit scores Liz Weston, CFP(r), is a personal finance columnist, co-host on”Smart Money” podcast, co-host of “Smart Money” podcast Award-winning journalist and creator of five novels about finances, which includes the bestseller “Your Credit Score.” Liz has been featured on a variety of national radio and television programs such as the “Today” program “NBC nightly news,”” as well as the “Dr. Phil” show, as well as “All Things Considered.” Her columns are carried in the media by The Associated Press and appear in a variety of media outlets each week. Before joining NerdWallet, she was a writer for MSN, Reuters, AARP The Magazine and the Los Angeles Times. She lives located in Los Angeles with a husband as well as a daughter, and a golden retriever who is a co-dependent.
Jul 20, 2017
Edited by Des Toups Lead Assigning Editor | Student loans and repaying college debt, financing college Des Toups leads the student loans and auto loans teams at NerdWallet Prior to that, he led NerdWallet’s personal loans as well as consumer finance departments. He also has led editorial teams for CarInsurance.com, Insurance.com and MSN.com and was an editor and reporter for The Seattle Times, Anchorage Daily News, Albuquerque Journal, Colorado Springs Gazette-Telegraph and Biloxi Sun Herald.
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Daniel Montville knew a debt consolidation loan won’t be able to solve his financial issues, but the hospice nurse hoped it would give him some relief. He’d already had a bankruptcy filing in 2005, and was determined not to make the same mistake again.
Montville took out the loan in 2015, but within a year, he was fallen behind on its payments and also on the payday loans he got to help his daughter, an unemployed mother of four children. The payday lenders all but eliminated his bank account every time a paycheck came in, leaving little money to pay for the essentials. Then , his daughter lost her job, and the tax refund of $5,000 she had promised to him as repayment went instead to helping her children.
“That’s when I wised up and realized this was a non-win scenario,” says Montville, 49, from Parma, Ohio. Montville is now paying his creditors in a five-year Chapter 13 bankruptcy repayment plan.
could be a response to the pleading of a struggling borrower, but it often doesn’t deal with the excessive spending that led to the debt in the first place. Within a short time many borrowers find themselves being buried in debt.
“It’s simple to fix it,” says Danielle Garcia an expert in credit counseling at American Financial Solutions in Bremerton, Washington. “They aren’t fixing the root cause of the issue.”
In the skillet
The five-year 17,000 loan Montville received from his credit union, for instance it paid off 10 high-interest credit card balances, reduced the rate of interest on the debt from double digits to a mere 8%, and provided a monthly fixed payment of $375, which was less than the amount he was currently paying in total on the credit cards.
What the loan did not accomplish but change Montville’s habits of spending. The repayment of credit card debt only gave him space to charge.
Some of the debt stemmed due to unexpected expenses such as car repairs. However, Montville estimates that 60% of the debt of the debt was a result of “foolish spending.”
“I was looking for a TV. I needed clothes. I’m planning to go to a movie,” Montville says. When he purchased a brand new computer, he noticed only the small monthly payment of $35, not the interest rate of 25%. rate he was being assessed. When his daughter was in financial difficulties, he resorted into payday loans because his cards were overloaded.
The fact that he’s unable to longer borrow — his credit card accounts are closed and he’ll need the approval of the bankruptcy court to replace his car — Montville is now pondering what he really wants to purchase versus what he wants to buy. He considers whether he can go without a purchase, or delay it. If he really wants something, he saves for it.
“My impression is that I should pay only cash,” Montville says. “Once I pay cash, nobody will be able to steal it.”
Consolidation a strategy, not a solution
Montville’s attorney, Blake Brewer, says many of his clients don’t have any idea what their spending amounts are against their income. They assume that their forthcoming tax rebate or a stretch of overtime will allow them to catch up, without realizing they’re spending far more than they make.
“These people are amazed when I sit with them and get the calculator,”” Brewer says.
A few of his clients have consolidated their debt using one of the options: a 401(k) loan or a home equity line of credit. They boast of saving money since they reduced the interest rate, but they aren’t aware that they’re spending assets like retirement accounts and homes equity that typically are protected by creditors during bankruptcy courts.
Anyone who is looking to consolidate debt can wind up with the promise of persuading lenders to pay lesser than the amount they’re due. Settlement of debt typically leads to significant damage to credit scores, but success isn’t guaranteed and some firms simply vanish with the hundreds of dollars they demand.
A loan from a credit union or a reputable online lender — don’t have to be a disaster if borrowers:
Stop using credit cards
Set an annual budget
Save for emergencies so they don’t have to borrow to cover the unexpected expenses
The most important thing is that their debt must remain manageable, and payable in the threeto five-year duration of the standard loan. The debt consolidator loan. If it would take longer than five years before they can pay the balance by themselves, borrowers should consult a or .
“By the time the majority of people seek help, they’re already in too in the hole,” says Garcia, the credit counselor.
Liz Weston is a certified financial planner and columnist at NerdWallet which is a personal finance website, and creator of “Your Credit Score.” Email to: Twitter @lizweston.
This article was written by NerdWallet and first released by The Associated Press.
About the author: Liz Weston is a columnist at NerdWallet. Liz is certified as a financial advisor, and author of five money books including “Your Credit Score.”
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