Our law firm does not provide debt consolidation. We provide representation for bankruptcy, debt settlement, foreclosure defense and mortgage loan modifications. Over the years, we have seen many clients who have been involved in debt consolidation and have suffered from the side effects of such programs.
How does debt consolidation work?
In a debt consolidation program, the consumer is charged up-front fees by the consolidation company to begin the program. These fees go to the debt consolidation company, not to the creditors.
The debt consolidation company sets out to negotiate, on the consumer's behalf, reduced monthly payments or reduced payoff amounts for the debts that are owed. If agreements are reached, the debtor begins making monthly payments (typically for several years) to the debt consolidation company while the debt consolidation company distributes the money to the creditors.
What are the hidden dangers of debt consolidation?
#1 You could pay thousands of dollars and still not have your debts settled.
During the initial phase of a debt consolidation, you will be asked to pay money to the debt consolidation company. During this time, your creditors are not getting paid. Consumers are typically led to believe that they are safe from lawsuits and wage garnishments during this time. This is not true. It is not unusual for consumers to pay thousands of dollars over a several months and to still get sued and have their wages garnished.
#2 You could reach an agreement and still get sued for the debt.
Often, the agreements reached by debt consolidation companies are not legally binding. The creditor could accept your reduced payments for a while and then come after you for the full amount.
#3 Your credit rating may suffer more than expected.
Many people choose debt consolidation because they are led to believe it will have less of a negative impact on their credit rating than if they file bankruptcy. This is not necessarily true for many consumers. Consumers fall farther behind on their payments while they are paying fees to debt consolidation companies. Debt consolidation plans typically last two to three years. During the time that you are making payments to a debt consolidation company, your credit report will still reflect that you owe money to your creditors.
Long after a consumer would have his or her debts discharged in a Chapter 7 bankruptcy (and be re-establishing his or her credit), he or she will still be paying on the debt consolidation.
Chapter 13 allows consumers to truly "consolidate" based on the amount they can actually afford to pay their unsecured creditors - many times resulting in Chapter 13 repayments of only a percentage of what is owed to the unsecured creditors (i.e., 10 percent). The balance is discharged, just as if the consumer had otherwise qualified and filed Chapter 7.
A New York Times reporter describes the heartbreaking pitfalls of debt consolidation in the article, "Peddling Relief, Firms Put Debtors in Deeper Hole."
If you would like to learn about all the options for solving your debt problems, contact one of our Columbus, Ohio, area law offices to schedule a free consultation with an attorney.