To Consolidate Debts Or Not

Admittedly, among debt programs, debt consolidation has the most differing reputation. On the one side, it is the best debt management program. But still, there are some that advise to steer clear of consolidating debts as it would only lead to worse debt problems. Despite the many debates, the question remains if it can really put an end to debt problems or is it just the start of a new cycle of debt. Finance experts agree that the first step to determining the truth about debt consolidation is understanding its role in managing debt. Debt consolidation is rolling all smaller separate loans into a single larger loan. This comes with a lower interest rates and a longer payment term. In effect, debt consolidation allows debtors to write a single check for paying the larger loan instead of writing different checks for different loans, hence, reducing total payment per month. There are also different ways in consolidating debt, and the most popular is transferring debts into one credit card account that has lower interest. Equity loans are also an option for debt consolidation. This is easy as most banks offer equity loans for homes, especially if the debtor can prove that he is capable of making regular payments. There are also lending companies that offer consolidation packages. However, all these options have drawbacks. They usually ask for processing fees and may have higher interest rates compared to the interest of the separate loans. Lending companies and banks might even require that the debtor put his house or any valuable property as collateral.

Debt consolidation, in this perspective, draws up a lot of advantages. It makes for easier payments, lower monthly dues, and at times, lower interests in the total consolidated debt. However, as with most debt programs, debt consolidation, as debt management option also has its disadvantages. First, in putting houses up as collateral, the debtor runs the risk of having his property foreclosed, in the event that he can’t settle his accounts. Also, if there is a longer term for payment, the total interest for the consolidated loan is possibly higher even if the monthly interest is significantly low. Therefore, the debtor does not really save more money but actually pays more money. Aside from these, the longer terms of payment would have the thought of the debt hanging over the debtor’s head for a longer time.

Joel Greenberg, a finance executive, advises debtors not to be blinded by the myths about debt programs, debt consolidation, or debt management promos. To identify the advantages and drawbacks of using these programs, Greenberg strongly suggest the use of calculators or debt management software to determine what option would be better. Computing the total payments and interest of both the individual loans in comparison with the consolidated loan will give you a clearer picture of your financial situation. Getting swayed by false advertisements is not a good way to save your credit and property.

Debt Relief — Why Most Programs Have A 75% Failure Rate

Debt consolidation, equity loans, credit counseling, debt management plans, even Chapter 13 bankruptcy – it doesn’t matter which of these debt programs you’re talking about. They all suffer from one fatal flaw, the number one problem that causes most people to fail at eliminating their debts through these techniques. Can you guess the problem?

It’s probably not what you’re thinking. It’s not the fees, interest rates, or the quality of the companies behind these debt solutions. No, the number one problem with most debt programs is that they require FIXED monthly payments without exception. This major flaw is the main reason that very few people make it through a credit counseling program or a Chapter 13 bankruptcy plan.

Do you make exactly the same amount of money each and every month? If you are like most people, the answer is probably NO. It’s easy to understand why. Salespeople, for instance, often experience ups and downs based on how much commission they earn from one month to the next. Seasonal workers experience boom and bust times depending on the time of the year (think retail workers getting lots of overtime around the holidays). Overtime hours come and go depending on company workloads. Part-time jobs may offer hours that vary widely from week to week. And so on.

Now, what about your expenses? Do you spend exactly the same amount of money each and every month? Sure, your mortgage or rent and your car payments are a set amount each month. But doesn’t your utility bill go up and down depending on the weather? What about your phone bill? How much will you spend on car repairs over the next 6 months? Medical bills? Dental bills? Can you predict such variable expenses with any accuracy?

If you have lots of room in your budget, with money left over at the end of the month, then fluctuating income and expenses are probably not a major issue for you. However, if you are struggling to make ends meet, living from one paycheck to the next, then an unexpected expense can destroy your monthly budget.

People enter debt relief programs with the best of intentions. Take credit counseling, for example. You enter a program to get some help in bringing your credit card debts under control. The monthly payment of £500 sounds good. You’re humming along just fine for a few months, then wham! The water heater blows up. Time to shell out £800 for a new one. Unless you like cold showers, you’ll need to skip the £500 payment to the agency this month, and part of next month’s payment as well. Where does that leave you with the credit counseling program? Back on the street, that’s where. You simply CANNOT miss payments into that type of plan and expect anything but failure.

Or look at Chapter 13 bankruptcy, where the court requires you to pay a set monthly amount to your creditors over a 3-5 year period. Even before the drastic new law went into effect, 2 out of every 3 people failed at Chapter 13 bankruptcy. It will get much worse under the new law, because the court will set your monthly budget for you, based on what the IRS says it should be for your state and county. This is simply unrealistic, and once people realize how bad the new law is, they will run in the other direction from Chapter 13. (Forget about Chapter 7, where you wipe the debts away. The new law will make it very difficult to qualify for the old Chapter 7 fresh start.)

Again, the big problem with most debt relief programs is lack of flexibility. You cannot call your loan officer, the credit counseling agency, or the court trustee and say, “Hey, my kid broke his leg and I had to pay the hospital £500 to cover my insurance deductible, so I’ll need to skip my debt payment this month.” If you could, then these plans might have a chance of working. But such inflexible programs simply do not reflect the unpredictable nature of the average household budget.

So is there any debt program that does provide this flexibility? Yes. It’s called debt settlement, or debt negotiation. It’s certainly not for everyone. Debt settlement is an alternative to bankruptcy. It’s not for people who can pay their bills in full without hardship. But it can be a real blessing for those seeking relief from a crushing debt burden.

The reason debt settlement is so flexible is simply because YOU control the cash. You build up money in a separate savings account until you have enough to make a reasonable offer to one or more of your creditors. Like any debt program, debt settlement has its downside and its risks, but no other program provides this level of flexibility. Because the monthly payment is going into a negotiation fund that you set up and control, a bad month simply means you have less money to settle with. If you can make it up later, that’s great. If not, that’s life. When you have enough to settle ONE account (usually between 35% and 50% of the balance owed), then you make an offer. If your creditor takes the deal, then you start building up funds to knock out the next debt, and so on. It’s the only program out there that recognizes a basic reality: Your budget should set the pace for your debt elimination program, not the other way around!

Again, debt settlement is not a magic bullet. It won’t cure every debt problem. But if you need to skip a month, or adjust up or down a little to reflect what’s going on in the real world, it doesn’t mean the end of the program. It’s truly a shame that the financial “experts” who have set up the bankruptcy rules, consolidation loan terms, credit counseling plans, and debt management programs haven’t figured this out yet. If they would just recognize this fundamental problem, then the success rate on their programs would increase dramatically and they could stop misleading the public about what works and what doesn’t in the world of debt relief.

Credit Counseling — Why It Doesn’t Work For Most Debtors

“Cut Your Payments in Half!” the headline screams. “Consolidate Your Bills into One Low Monthly Payment!”

When you see ads like this, they are often from Credit Counseling firms. In this article, I’ll explain the principles behind the Credit Counseling approach and discuss the main problem consumers face when they join one of these programs.

First, let’s get our definitions straight. The term “Credit Counseling” is actually quite misleading, since it has nothing to do with preserving or improving your credit score. In fact, Credit Counseling will often damage your credit, an unpleasant reality that is sometimes downplayed by industry representatives.

Credit Counseling is a debt management program where you make a single monthly payment to an agency. In turn, that agency distributes the money to your creditors on your behalf, ideally at lower interest rates so you can pay off the debt faster. Credit Counseling should not be confused with Debt Consolidation, Debt Settlement, or Debt Termination. Each of these debt programs takes a very different approach from Credit Counseling.

Of all the available debt options, Credit Counseling is by far the most popular, with millions of Americans participating. Does this mean it’s the best choice for most people struggling with debt? No! There are numerous problems with this approach.

In recent years, the Credit Counseling industry has been heavily criticized by impartial consumer groups like the Consumer Federation of America. But these criticisms often miss the mark entirely. They usually focus on the aggressive companies that use their non-profit status to trick consumers into thinking they are charitable organizations, or even that their services are free of charge. In reality, these outfits charge hefty “voluntary” contributions, often adding up to hundreds of pounds, plus steep monthly fees as well.

However, I’m not talking here about the bad companies who provide little or no actual “counseling,” or the ones that are only in business to make their owners rich. No, I’m talking about serious problems with the actual business model itself. So let’s take a closer look at how Credit Counseling works.

Let’s say you owe £25,000 on several different credit cards. Let’s also assume your average interest rate before you enrolled was 20% (which is actually low these days, especially if you’ve missed any payments). Your minimum monthly payments are £500, which you’ve been struggling to keep up with. At this rate, it will take a whopping 109 months (more than 9 years) to pay off your debts, assuming you don’t miss a single payment along the way.

You enroll in a Credit Counseling program that promises to get you out of debt faster. But does it? Assuming your creditors agree to participate in the program (not always the case), the real key is the concession they will grant on your interest rates. In prior years, creditors looked more favorably on Credit Counseling and they offered steep discounts off the normal interest rates. But lately they have squeezed the industry, and the concessions are not so good any more. Currently, most of the major players will reduce interest rates down to a range of 7% on the low side to 18% on the high side. We’ll use 12% as the average.

So if you keep your payments at £500 per month at the new 12% rate, how long will it take? First, we need to deduct the monthly fee charged by the agency. In this example, we’ll use a fee of £25 per month, so £475 of your £500 will go toward debt reduction. The good news is you’ll be out of debt faster. The bad news is that it will still take 75 months (more than 6 years) to become debt-free.

But what happens if you can’t keep up with that £500 per month? After all, you sought help from a credit counselor because you were struggling financially, right? Let’s say you drop down to £450 per month. After deducting the £25 monthly fee, that leaves £425 toward your debt plan. Now you’re looking at 90 months (7 years & 6 months), which is not much better than the 109 months you started out with.

So how can credit counselors claim to cut your payments in half? Good question. If you dropped down to £250 per month, you’ll never pay off your debt! At 12% interest, the debt will climb faster than your £250 per month can reduce it. The lowest you could go would be £300 per month. However, it would now take 20 years to pay off the debt, hardly an improvement!

In order to truly cut your payments in half, down to £250 in this example, the agency would need to completely eliminate all interest! And even then, it would still take more than 9 years to pay off the balance! So the ads claiming you can cut your payments in half are simply false.

Bear in mind here that in our example, we’re assuming you’re working with a good company that charges low fees and actually obtains good interest rate concessions from all of your creditors. Even with the best of credit counselors, you’re still looking at a 5-9 year program to pay off your debts.

That’s why Credit Counseling is usually only effective for people with short-term financial problems. Consumers with long-term financial instability have trouble keeping up with the regular payment stream required to make these programs work. The result? Even the most favorable statistics show that about 3 out of 4 people drop out of Credit Counseling programs before completing them.

If you do decide to join one of these programs in order to obtain some short-term relief, be sure to do your homework first. Here are a few tips to help in your selection:

1. Look for a company that actually provides old-fashioned budget advice and counseling. If they want to sign you up right away without first understanding your budget situation, move on!

2. Obtain copies of the contract and read it carefully before signing up. Make sure you understand all of the fees involved. Are there enrollment fees? “Voluntary” contributions? Monthly fees? Extra fees per account? These hidden fees can add up to big bucks.

3. Make sure they work with all the creditors on your list and not just some of them.

4. Don’t be fooled by “non-profit” status. That doesn’t guarantee you’re dealing with a good company. And it certainly doesn’t mean the service is free!

5. Aim to find a local company that you can visit in person. Check out your target company with the local Better Business Bureau.

6. Make sure they provide support after the sale. Try calling their customer service number to see if you can get through promptly.

Remember, you can eliminate your debts if you take a disciplined approach to your finances, make a budget and stick to it, and don’t use your credit cards unless you can pay off new balances in full each month.

Good luck in your financial future!