Dangers of Debt Consolidation Programs

Posted by William Kain on September 30, 2017 at 12:30 PM
William Kain

You’ve heard them on the radio and seen them on TV. They make promises about eliminating your debt in no time at all, at no cost to you. All you have to do is make the phone call and your debt can be put in the past. Well this sounds great, and your first conversation may go great, too. However, debt consolidation programs like to put all of the exciting benefits and the promise of a better tomorrow at the front, so you don’t see what lives behind the curtain.

dangers of debt consolidation

All of the components of a debt consolidation program will be defined in the fine print, but most people don’t thoroughly read or sift through all of this information and legal jargon jumbled into the contract. It is your responsibility, not the debt consolidation company’s, to fully understand and agree to all of the elements spelled out in the contract before signing the dotted line. Unless you ask direct questions, the contract may be the only means of providing you all the information you need.

Here are some ways to avoid entering into a harmful debt consolidation program and some fine print details you need to be aware of:

Questions You Should Ask the Debt Consolidation Company

When communicating with a debt consolidation company, be sure to ask the following questions:

  • What type of debts do you cover?
  • Why is this program right for my financial situation?
  • How will it solve my financial problems?
  • How much will I have to pay in fees?
  • What is the tenure of the program? How long will it take for me to become debt free?
  • If I make a late payment, what are the late charges or penalties?
  • What will my new monthly payment be and how is that determined?

Also, in order to avoid entering into a program that will not improve your situation, you could talk to a bankruptcy attorney and discuss debt consolidation options and how they will affect your specific situation.

Consider the Costs

Discussions about fees are brief or don’t happen at all unless you specifically ask about it. It is very easy for debt consolidation companies to take a percentage of your monthly payments without you noticing.

Also, in debt consolidation programs timelines for payment often get extended to ensure you are making fair and adequate payments to all of your creditors. An extended repayment period typically results in you paying more and your debt consolidation company making more money.

Understand the Effect It Will Have On Your Credit Score

It is a common misconception that bankruptcy negatively affects your credit score. In fact, people often turn to debt consolidation programs because they don’t want to harm their credit score by filing for bankruptcy. According to Business Insider, between 2 and 2.5 million Americans consult a credit counselor every year to elude bankruptcy. More often than not, your poor financial history is what has negatively impacted your credit score, not the fact that you filed bankruptcy.

Debt consolidation programs can harm your credit score too. Missed, late and lower payments, plus closed accounts, negatively affect your credit score and the success of debt consolidation programs revolves around these three conditions. Make sure you thoroughly discuss this concept with the debt consolidation company before signing the contract.

Realize That Your Creditors Do Not Have To Participate

Debt consolidation programs are appealing because they promise lower interest rates and lower monthly payments, but what they don’t make obvious is that your creditors DO NOT have to participate. Creditor compliance with a debt consolidation program is voluntary. If the negotiations aren’t appealing for your creditors, your creditors can turn down any requests for lower payments, reduced interest and fees or other plan requests.

Also, debt consolidation companies do not have the power to prevent your creditors from taking legal action against you to collect on your debts. Creditors may still engage in collection activities and take legal action, such as lawsuits, wage garnishments and repossessions, to collect on your debt. Just because you enter into a debt consolidation program does not mean creditors will stop trying to collect the money you legally owe them.

Talk to a bankruptcy attorney today if you are concerned about entering into a debt consolidation program, but need debt help. They can advise you to enter in the debt consolidation program that best suits your situation or recommend filing for bankruptcy if that solution fits your situation better.

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Topics: Debt Consolidation