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The Truth About Debt Consolidation

We’ve all heard those radio or television advertisements that claim that they can consolidate your credit card debt and settle it so that you only have to pay as little as 5% of what you actually owe. Sounds great doesn’t it.  If I’ve learned anything over the years it’s that if anything sounds too good to be true, it usually is.  That old adage certainly applies here.

For starters, there are numerous details these debt consolidation companies neglect to inform their prospective clients about prior to having them sign their contract. I have hundreds of clients that have come to us after trying the debt consolidation route and to a person they tell me that the details of the consolidation program were never completely explained to them.  My clients also indicate that if they had known the details prior to signing the contract they never would have moved forward.

 Generally, when you start the process with a debt consolidation company, they will take a look at your total credit card debt and then will give you a monthly payment plan, which is a fraction of what you are now paying and they claim will be sufficient to settle all of your debt.  Let’s for example say the consolidation company gives you a plan that calls for $1000 per month, which you will pay to them and they will settle your $70,000 of credit card debt. You sign your contract and start diligently sending your payments in every month to the consolidation company instead of sending your payments to the various credit card companies.  You’re relieved that this company is now dealing with all of your creditors so you can relax, right…wrong!

What’s included in the consolidation company’s contract language that normally isn’t explained to you, is that the first 6 payments that you make them all go to pay the consolidation company’s fee.  Then, normally from the subsequent 6 payments, half of what you pay goes to the consolidation company’s fee.  Thus, under the example, if you paid your $1,000 every month for a year, $9,000 of that money would be going to pay the consolidation company’s fee.  The balance of the money that you have paid in goes into a trust account.  The contract you signed further indicates that the consolidation company will not begin negotiating with your creditors until a certain sum is contained in your trust account.

However, long before you even get to a years worth of payments to the consolidation company, your creditors are harassing you, putting you into collections, filing lawsuits and perhaps ultimately acquiring judgments against you.  Additionally, all of your creditors have begun reporting negatively on your credit once you stop making regular monthly payments to them, thus your credit is now destroyed. Yet none of these ramifications of a debt consolidation program have ever been explained to you.

The likely end result is that you have now paid thousands of dollars to a consolidation company and received virtually no benefit.  Most of my clients that have come to us after having tried the consolidation route, finally come in after their creditors have received judgments against them and the clients are now having their wages garnished or bank accounts levied. These clients indicate that the consolidation company initially tell them  to direct all creditor calls to them and they will take care of the creditors.  Not long after you start the consolidation process and begin paying the consolidation company, you realize there is really nothing the consolidation company will do about the creditor calls, nor is there anything they can do.

The reality of the situation is that your creditors have no obligation to deal with your consolidation company nor does the consolidation company have any type legal hammer to use against your creditors.  In other words, they can’t make your creditors deal with them, they can only hope they do.

It’s also probably likely that the debt consolidation company has advised you early on that you should go the consolidation route because a bankruptcy will ruin your credit.  Well, I’ve already illustrated how that worked out for you.  So what should you do when you can’t pay your bills any longer?  In almost every case, the filing of a bankruptcy is a better choice.

The United States Bankruptcy Code gives you the legal hammer that you need to deal with your creditors-on your terms.  If you consult with a knowledgeable baknruptcy attorney (make sure it’s someone that specializes in bankruptcy not someone dabbling in it), that person can lay out your options.  These options could be that you are able to discharge all of that unsecured debt in a Chapter 7 case or that you can re-pay what you can afford monthly in a Chapter 13 case over a 3 or 5 year period.  You would then be discharged of any reamining balances owed your unsecured creditors once you have completed your chapter 13 plan.  As long as you are complying with the guidelines set forth in the Bankruptcy Code when proposing your chapter 13 plan, your creditors have no choice but to accept the plan.

Don’t let your creditors or a debt consolidation company scare you away from exploring the bankruptcy option.  It is only for self-serving reasons that they are trying to do so; they certainly don’t have your best interests at heart. Don’t you owe it to yourself and your family to explore all of your options?

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