Stay Away From Debt Consolidation

Donna wants to know if there's ever a good reason to use a debt consolidation company. Dave says it may be a good idea to avoid a bankruptcy, but most of the time, it's a bad plan.

QUESTION: Donna in Los Angeles wants to know if there’s ever a good reason to use a debt consolidation company. Dave says it may be a good idea to avoid a bankruptcy, but most of the time, it’s a bad plan.

ANSWER: I guess to avoid bankruptcy might be one possibility. Most of the time, it doesn’t work out. Most of the time, the math doesn’t even work out. It’s kind of an illusion. By that I mean oftentimes you take some high-interest stuff and roll it into something, and you also roll in some no-interest stuff like medical bills and those kinds of things, and then you really don’t get that great a rate on the consolidation to start with. Getting one loan instead of four loans—unless you’re saving on interest—usually what happens is people try to put it on a smaller payment than they’re paying just to get some relief, and they don’t change their habits so they don’t pay any extra, so they end up staying in debt.

You’re not considering a real consolidation. That’s just someone who’s going to do payoffs for you. You pay them, and then they pay the bill. That’s not consolidation. That’s just somebody managing your credit card debt for you. They call it consolidation. Consolidation is when you get one loan to pay off three. You consolidate the loans. You only have to make one payment, but you still have the same loans in place.

I would not do any of that. They may be able to cut interest rates here or there, but you can as well in your negotiations, and if they’re going to try to settle with the credit card companies for pennies on the dollar—if it’s that type of company—definitely stay away from those. You go do that yourself.

The Federal Trade Commission at ftc.gov says this type of company is the second highest complaint of all categories to the Federal Trade Commission. Huge levels. Almost all customers are dissatisfied and mad and feel ripped off. It’s just not a magic bullet.

The only way you can settle for less on a credit card is if you’re behind. They don’t take less. The debt consolidation company can’t do this. They’re going to teach you to get behind. The way you’re going to get behind is what you used to pay your credit card companies you’re going to pay them as a fee while they don’t pay the bill until their fee gets paid, and then you’ll be four, five, six months behind. Then they’ll come in and start negotiating with them. I would not do that at all. Instead, I would continue to work on this with the cards. Let’s crank up your plan.

I’ll put you through Financial Peace University. I think I can show you how to fix this. When you go through that class, you’ll learn how to cut back to nothing, take extra jobs, sell so much stuff the kids think they’re next, and really plow into these things. I can show you how to walk out of this stuff. You go do that, and I won’t charge you a thing for it. I’ll give you the class free.

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