The Debt Consolidation Process Can Go wrong

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How Debt Consolidation Can Go in the wrong direction
by Liz Weston, CFP(r) Senior Writer | Personal Finance, credit scores, economics Liz Weston, CFP(r) is a personal financial columnist co-host on"Smart Money," the "Smart Money" podcast, award-winning journalist and writer of 5 books about finances, which includes the bestselling "Your credit score." Liz has been featured on a variety of radio and national TV shows, including the "Today" show "NBC The Nightly News,"" as well as the "Dr. Phil" show and "All Things Considered." Her columns are published through The Associated Press and appear in hundreds of media outlets every week. Prior to NerdWallet, she was a writer articles 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 that is co-dependent.





July 20 July 20, 2017


Written by Des Toups Lead Assigning Editor | Student loans and repaying college debt, paying for tuition costs for college Des Toups leads the student loans and auto loans teams at NerdWallet Prior to that, he was the head of NerdWallet's private loans and consumer finance teams. He has also led the editorial team members for CarInsurance.com, Insurance.com and MSN.com and worked as reporter and editor at 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 would not solve his financial issues, but the hospice nurse was hoping it would provide him with some breathing room. He'd filed for bankruptcy once, in 2005 and had a firm resolve not to repeat the mistake.
Montville took out the loan in the year 2015, however within a year, he was fallen behind on its payments and also on the payday loans he got to aid his daughter, a single mom with four children. The payday lenders eliminated his bank account each time a check was paid, leaving little money for necessities. Then his daughter lost her job and the tax refund of $5,000 she had promised to him as repayment went instead to her children.
"That's when I realized I was wrong and realized that this was not a win-win situation," says Montville, 49, from Parma, Ohio. Montville is now repaying his creditors in a five-year Chapter 13 bankruptcy repayment plan.
can feel like the answer to a borrower's need however, it doesn't always solve the issue of overspending that led to the debt initially. In a short period of time many borrowers find themselves being buried in debt.
"It's an easy fix," says Danielle Garcia, a credit counselor with American Financial Solutions in Bremerton, Washington. "They aren't fixing the root of the issue."
From the skillet
The five-year 17,000 loan Montville obtained through his credit union for example, paid off 10 high-rate credit card balances, reduced the rate of interest on the debt from double figures to a mere 8%, and also offered a fixed monthly payment of $375, less than what he was paying combined on the cards.
What the loan didn't do however was alter Montville's habits of spending. Paying off the credit cards simply gave him more room to charge.
Some of the debt stemmed from unexpected costs such as car repairs. However, Montville estimates that 60% came from "foolish expenditure."
"I was looking for a TV. I was in need of clothes. I'd like to see a film," Montville says. When he bought a new computer, he saw only the low monthly payment of $35 but not the interest rate of 25%. rate that he was being paid. When his daughter got into financial troubles, he went to payday loans because his cards were maxed out.
Now that he is unable to more borrow money credit -the credit card accounts are shut and he'll require the bankruptcy court's permission to replace his car -- Montville finally is thinking about what he actually needs to buy versus what he wants to buy. He considers whether he can go without a purchase, or postpone it. If he truly desires something, he will save for it.
"My impression is that I should pay cash only," Montville says. "Once I have paid cash, nobody will be able to steal it."
Consolidation a strategy is not a cure
Montville's lawyer, Blake Brewer, says many of his clients don't have any idea what their spending amounts are against their income. They think that their forthcoming tax rebate or stretch of overtime will allow them to catch up, not realizing that they are spending more than they make.
"These people are just stunned when I sit down with them and get the calculator," Brewer says.
A few of his clients have consolidated their debts using the 401(k) loan or a home equity line of credit. They boast of saving money by lowering their interest rates, but they aren't aware that they're spending funds -- retirement accounts and home equity that typically would be protected against creditors when they file bankruptcy courts.
People seeking debt consolidation also can wind up with the promise of persuading creditors to settle for lesser than the amount they're due. Debt settlement typically causes a major hit on credit scores, but the success of this method isn't always guaranteed. Some companies simply disappear with the thousands of dollars they charge.
-- through the credit union or trusted online lender do not have to be a disaster if borrowers:
Stop using credit cards
Commit to the creation of a budget
Reserve money for emergencies so that they don't have to borrow to pay for unexpected costs

The most important thing is that their debt has to have the ability to be repaid in the three- to five-year period of the typical debt consolidation loan. If it will take more than five years before they can pay the balance on their own, the 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 the personal finance site, and author of "Your Credit Score." Contact: Twitter @lizweston.
This post was written by NerdWallet and was originally printed 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 books on money including "Your Credit Score."







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