Forget debt consolidation!

Posted by Boadicea (66.149.179.202) on August 11, 2004 at 19:03:54:

In Reply to: chapter 7 or else posted by steven on August 11, 2004 at 13:38:07:

It's obvious you are overextended, but if you have not yet missed payments there may be some hope. Perhaps you have not yet explored all of your options yet.

Here is why debt consolidation companies are a scam: They promise a service, but they can't guarantee results. They may *try* to negotiate with your creditors, but the truth is that most creditors refuse to work with them. All they will do is trash your credit. As soon as your creditors see that you are overextended and working with a debt consolidation company, they will simply close your accounts and reduce the credit line so that you are automatically in default. Not exactly legal, but you'll spend years trying to dig your way out of the mess.

Student loans are not bankruptible under normal circumstances. With a steady income and good health, you almost certainly won't be able to include them in the Bk. However, have you already consolidated the loan with the government, such as with Direct student loans? If so, you can reduce your payments by spreading them out over as many as 25 years. For $47K in loans, you could be spending as little as $220 a month, and you can adjust the payment plan up at will after you recover. Interest rates are also at their lowest right now, and could be much lower than what you are currently paying.

If I were you, I'd look at the interest rate on the credit cards. Although many might disagree, I would looking into other resources such as my 401k. If you can consolidate all or most of the credit cards into a 401k loan, the interest rate is probably around 4% right now. If the payments are less than the CC payments combined, it would give you some breathing room and you'll pay off the debt far sooner (5 years vs 30 years for a revolving line of credit).

BUT if you don't CLOSE THOSE ACCOUNTS immediately on paying them off, then VOW NEVER USE THEM AGAIN until you've paid off the 401k loan, you'll just be digging yourself another hole that would ensure bankruptcy. (Stick to a charge card that you must pay off every month, or a debit card that comes out of your checking account to curb your spending.)

But if you are fairly young and have the necessary self-discipline to stick to a program back to financial health, then that's the course you should probably take. Unfortunately, most people fall back into their old habits of opening and using lines of credit before they pay off the old debts, and that is why most of us never advise anyone to take that route. But 7 to 10 years of bad credit is far worse than anything you can imagine.

Finally, you need your spouse to be in alignment with your vow to regain your financial footing. It takes two to make that type of debt...it'll take the two of you to dig out of it.

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