What happens when debt consolidation goes Wrong

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The Debt Consolidation Process Can Go in the wrong direction

Written 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 an award-winning journalist, and the writer of 5 books about finances, which includes the bestseller “Your Credit Score.” Liz has appeared on numerous national television and radio programs such as the “Today” show “NBC nightly news,”” The “Dr. Phil” show, as well as “All Things Considered.” Her columns are distributed through The Associated Press and appear in a variety of media outlets every week. Prior to NerdWallet, she was a writer for MSN, Reuters, AARP The Magazine and the Los Angeles Times. She shares a home located in Los Angeles with a husband as well as a daughter, and a golden retriever who is a co-dependent.

Jul 20 July 20, 2017

Editor: Des Toups Lead Assigning Editor | Student loans and repaying college debt, and paying for the cost of college Des Toups leads the student loans and auto loans teams at NerdWallet and, prior to that, he led the personal loans as well as consumer finance departments. He has also led the editorial team members at CarInsurance.com, Insurance.com and MSN.com and worked as 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 wouldn’t solve his financial problems, but the hospice nurse was hoping it would provide him with some relief. He had already had a bankruptcy filing in 2005 and was determined not to do it again.

Montville was able to take out the loan in the year 2015, however within a year, he’d fallen behind in his payments as well as his payday loans he got to aid his daughter, an unemployed mother of four children. The payday lenders took his checkbook each time a paycheck landed and left him with only a small amount of money to pay to pay for the essentials. His daughter was fired from her job and the tax refund of $5,000 she promised him in exchange for repayment was used to her children.

“That’s when I wised up and realized that this was not a win-win situation,” says Montville, 49, of Parma, Ohio. Montville is now repaying his creditors under a 5-year Chapter 13 bankruptcy repayment plan.

could be a response to a borrower’s need but often it fails to solve the issue of overspending that led to the debt in the first place. In a short period of time many borrowers find themselves being buried in debt.

“It’s a quick fix,” says Danielle Garcia, a credit counselor with American Financial Solutions in Bremerton, Washington. “They aren’t fixing the root cause of the issue.”

Out of the fry pan

The five-year $17,000 loan Montville got at his credit union for instance it paid off 10 high rate credit card balances, reduced the interest rate of the debt from double figures to a mere 8%, and provided a monthly fixed payment of $375, less than what he was paying in total on the credit cards.

What the loan didn’t do, however, was change the way Montville spends his money. Paying off the credit cards only gave him space to make charges.

Some of the debt came from unexpected costs, such as car repairs. However, Montville estimates that 60% of the debt were due to “foolish expenditure.”

“I was looking for a TV. I needed clothes. I want to go to a cinema,” Montville says. When he purchased a brand new computer, he noticed only the small monthly payment of $35 and not the 25percent interest rate he was being charged. When his daughter fell into financial troubles, he went towards payday loans because his cards were fully loaded.

The fact that he’s unable to longer make loans credit — his credit card accounts are closed, and he would need the bankruptcy court’s permission to buy a new car- Montville is now pondering what he actually needs to buy versus what he’d like to buy. He contemplates whether he can do without a purchase or delay it. If he really wants something, he saves for it.

“My feeling now is, cash only,” Montville says. “Once I have paid cash, no one can steal it.”

Consolidation is a method but not an answer

Montville’s attorney Blake Brewer, says many of his clients don’t have any clue how their expenses stack up against their earnings. They believe that the next tax refund or stretch of overtime will help them catch up, not realizing they’re spending far more than they earn.

“These people are simply amazed when I sit with them and take out an calculator,”” Brewer says.

Some of his clients consolidated their debts using the 401(k) loan or a home equity line of credit. They pride themselves on saving money because they lowered their interest rates, but they aren’t aware that they’re spending funds — retirement accounts and homes equity — that generally are protected from creditors in bankruptcy courts.

People seeking debt consolidation also can wind up with agreements that promise to convince lenders to pay less than they’re owed. Settlement of debt typically leads to an enormous hit on credit scores, but it’s not guaranteed, and some firms simply vanish with the millions of dollars they charge.

— through a credit union or a reliable online lender aren’t required to be a disaster when the borrowers:

Stop using credit cards.

Make a commitment to an annual budget

Make sure to save money for emergencies so they don’t have to take out loans to pay for unexpected expenses

Most importantly, the debt should have the ability to be repaid within the threeto five year term of the typical loan. The debt consolidator loan. If it takes more than five years to pay off the debt on their own, borrowers must consult with a .

“By the time most people look for assistance they’re already too far,” says Garcia, the credit counselor.

Liz Weston is a certified financial planner, and columnist for NerdWallet, a personal finance website. She is also the author of “Your Credit Score.” Contact: Twitter @lizweston.

The post was written by NerdWallet and first published in The Associated Press.

Author bio Liz Weston is a columnist at NerdWallet. She is a certified financial planner as well as the author of five money books including “Your Credit Score.”

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