Don't Do Debt Consolidation
Question: Daniel on Facebook wants to know if debt consolidation companies can help conquer his massive debts. Dave explains what debt consolidation companies really do.
Answer: The truth is that debt consolidation doesn't mean what it says. It is no longer debt consolidation. When most people say debt consolidation, what they mean is debt settlement. It means that I'm behind on my credit cards, I'm behind on my debts, and this company is going to negotiate with my creditors and settle with them. That's what it means.
Do debt settlement companies work? Answer: No. Horrible, horrible, dirty, filthy industry that has about a 98% dissatisfaction rate. One of the number-one categories complained about to the Federal Trade Commission. They tell you to quit paying your payments and instead pay all your payments to them until their fee is paid, and then keep paying your payments to them, they'll save up that money for you, and then settle one of your debts, then save up that money for you, and then settle one of your debts. Then they'll go and deal with each one of your creditors and settle each debt. They'll do it all, and you don't have to worry about it for a mere $1,500 or $2,500 or $3,500. That's their program.
You know what? If you had $40,000 or $50,000 worth of debt and if they actually did what they say they do, it might be worth it. But almost none of them do any of what they say they're going to do. In other words, they basically take your money and then do nothing. That's the vast majority of them. You have a very low probability of ending up anywhere but bankrupt or so far in the hole it'll take you forever to get out if you screw around with these companies.
Stay away from them. Take the money you would've paid them and simply start negotiating with your creditors. Let's say you have three creditors or four creditors barking at you, and you save up a little bit of money to settle with one of them. You call one, and they give you a hard time, just say, "Listen, I'm going to call the next one if I hang up this phone, and that means you're going to get nothing until I save up some more money. Right now, I have $2,000 in my hand. Right now, I can settle with you, but if I hang up this phone, I've got five other people I can call. One of them is going to take this money, so it's up to you. I'll get to you, but it may be a year before I get to you if I hang this phone up." If they won't take it, hang up. Call the next one. Same pitch.
One of them you'll get to take your money. You settle it in writing, and you do not allow electronic access to your checking account. You don't even need to set up a payment plans. Just save up money and settle for lump sums. You can settle them for about $.25 on the dollar if it's been a year or more since they were paid. You owe them $10,000, you're broke, you don't have any money, you're out of work, or whatever. You finally get your job back. You're trying to dig out of this. You don't have any money. If you've got the money, write them a check. You owe the money. But if you don't have any money and you save up $2,500 and you can settle a $10,000 debt for that, then that's a good plan. Do that. Get it in writing and send them a cashier's check or money order or whatever. But no electronic access to your main checking account, because they lie. They will clean you out.
Do not use debt consolidation companies, because they're not really consolidating debt. Consolidating means you take five debts and you put them into one debt. A consolidation would be if you used your home equity loan and you went down and you used $20,000 out of your home equity loan and you paid off your medical bill, your credit card, and your car loan, thereby moving all of that over into a home equity loan. They are now consolidated, but I don't recommend that either. It's a bad idea to consolidate because you still haven't addressed the problem. The debt is still there. It just has a different form. "Well, the interest rate's less." The interest rate is not your problem. It's the fact that you've not been on a budget and reducing these debts. That's the problem.
You've got to address your behaviors. When you go in there and you fight with these companies and you settle with these companies, that'll happen. When you go in there and you lay out a plan and you work it through, you'll get out of debt that way. You will not get out of debt when someone else babysits it for you, because they don't do it. They don't follow through. Stay away from those companies.
