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, credit scores, economics Liz Weston, CFP(r) is a personal finance columnist, co-host on”Smart Money,” the “Smart Money” podcast, award-winning journalist and author of five books about money, including the bestselling “Your Credit Score.” Liz has appeared on many national radio and television programs, including”Today” show “Today” program “NBC Nightly News,” the “Dr. Phil” show, and “All All Things Considered.” Her columns are carried through The Associated Press and appear in hundreds of media outlets every week. Before joining NerdWallet, she wrote articles for MSN, Reuters, AARP The Magazine and the Los Angeles Times. She shares a home located in Los Angeles with a husband along with a daughter and a golden retriever that is co-dependent.

Jul 20, 2017

Editor: Des Toups Lead Assigning Editor | Student loans repayment of college debt, paying for tuition costs for college Des Toups leads the student loans and auto loans teams at NerdWallet; before that, he led the personal loans and consumer finance teams. He has also led the editorial team members on 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 believed it could give him some breathing space. He’d already declared bankruptcy before, in 2005, and was determined not to make the same mistake again.

Montville took out the loan in 2015, but within a year, he’d been in debt on the loan 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 for necessities. Then , his daughter lost her job and the tax refund of $5,000 she promised him in exchange for repayment was used to supporting her kids.

“That’s the moment I woke up and realized that this was a non-win scenario,” says Montville, 49, of Parma, Ohio. Montville is currently paying back his creditors in a five-year Chapter 13 bankruptcy repayment plan.

can feel like the answer to a struggling borrower’s prayer however, it doesn’t always address the overspending that caused the debt initially. In a short period of time the borrower is often buried deeper in bills.

“It’s a quick fix,” says Danielle Garcia who is a credit counselor at American Financial Solutions in Bremerton, Washington. “They don’t address the root of the problem.”

Out of the frying pan

The five-year, $17,000 loan Montville obtained from his credit union for example it paid off 10 high-interest credit card bills, lowered the interest rate of the debt from double digits to around 8% and provided a monthly fixed payment of $375, which was less than what he was paying in total on the cards.

What the loan didn’t do, however, was change Montville’s spending habits. Paying off the credit cards only gave him space to charge.

Some of the debt stemmed due to unexpected expenses like car repairs. However, Montville estimates that 60% were due to “foolish spending.”

“I wanted to own a television. I needed clothes. I want to go to a movie,” Montville says. When he purchased a brand new laptop, he noticed only the small monthly payment of $35 and not the 25percent interest rate he was being paid. When his daughter got into financial difficulties, he resorted to payday loans because his cards were fully loaded.

The fact that he’s unable to more borrow money — his credit card accounts are shut, and he would need the approval of the bankruptcy court to purchase a new car- Montville finally is thinking about what he wants to purchase versus what he wants to buy. He contemplates whether he can go without a purchase, or delay it. If he truly desires something, he will save for it.

“My current feeling is cash only,” Montville says. “Once I pay cash, no one can take it from me.”

Consolidation a strategy is not a cure

Montville’s attorney, Blake Brewer, says many of his clients don’t have any notion of what their spending amounts are against their income. They think that their subsequent tax return or a stretch of overtime will allow them to catch up, not realizing they’re spending far more than they earn.

“These people are just stunned when I sit down with them and take out a calculator,” Brewer says.

Some of his clients consolidated their debts with one of the options: a 401(k) loan or a home equity line of credit. They pride themselves on saving money because they lowered their interest rates, however they’re not aware of the fact that they’re wasting assets — retirement accounts and home equity that typically would be protected against creditors when they file bankruptcy the court.

Anyone who is looking to consolidate debt might end up with debt settlement agreements that promise to convince creditors to accept less than what they’re owed. The process of settling debts typically results in an enormous hit to credit scores, however the success of this method isn’t always guaranteed. Some firms simply vanish with the millions of dollars they demand.

A loan from a credit union or a reputable online lender — aren’t required to be a disaster when the borrowers:

Stop using credit cards.

Commit to the creation of a budget

Save for emergencies so they don’t need to borrow to cover the unexpected expenses

Most importantly, their debt has to have the ability to be repaid in the three- to five-year duration of the standard debt consolidation loan. If it takes more than five years to pay off the debt by themselves, borrowers must consult with a .

“By the time that most people go looking for help they’re already in the hole,” says Garcia, the credit counselor.

Liz Weston is a certified financial planner, and columnist for NerdWallet the personal finance site, and the author of “Your Credit Score.” Email Liz Weston on Twitter: @lizweston.

The piece was co-written by NerdWallet and was first released by The Associated Press.

The author’s bio: Liz Weston is a columnist at NerdWallet. Liz is certified as a financial advisor as well as the author of five books on money, including “Your Credit Score.”

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