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The Lie of Credit Card Consolidation

Every month I get around five new clients who are victims of "debt consolidation companies." These companies often say they are Christian-based or try to come off as not for profits. What they do is stall your financial future for multiple years. They make the debtor feel as though they are doing the responsible thing by paying back their creditors. The name Debt consolidation plays along the line of a debt consolidation loan, i.e. taking out a loan at a lower interest rate to pay off higher interest rate loans or cards. A consolidation loan is a great vehicle to get yourself out of the trap of high-interest cards.

However, the wolf masquerading as a debt consolidation loan is really a slow road to financial ruin. Playing off that name Debt Consolidation companies get you to think you are doing the responsible thing by letting them manage your debt. What they are doing is getting you irreparably behind on credit card or loan payments so the creditor will cut you a deal. This does somewhat get the desired effect of lessening the amount owed to the creditor. What it also does is destroys your credit with no pays on your credit report. Your credit gets destroyed a couple of years while you send the Debt company money to build up an account to cut a deal.

They often times fail to let you know that you will receive a 1099 for the amount you didn't pay. For example, a six thousand dollar credit card settled for $2,500 will result in a tax consequence for you at the end of the year of $3,500. The $3,500 will be the same as your income and will be taxed accordingly when you file your taxes. In addition, they will charge you somewhere between $500 to $1,500 to settle that debt. If you're lucky they will save you a couple of thousand bucks.

Sounds good right? it took you two years to come up with the $2,500 to settle. Another couple of years for the next card and now your four years in and your credit is completely destroyed. More than likely some of your creditors have waited long enough and are now filing suits. And you are still not close to your "Debt Consolidation" goal.

Do yourself a favor. Call me or another bankruptcy attorney and avoid this trap. A Chapter 7 bankruptcy takes five months from start to finish. You can immediately start rebuilding your credit after discharge and you owe no tax debt. There will be no 1099 for the money you saved. The $6,000 dollar card will have been discharged along with all your other unsecured debts. And for a fraction of the amount, you will pay the debt consolidation company and your creditors.