| 10 debt consolidation myths |
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| "The consumer
thinks this person is taking care of them. But in my client's case, the company
ran up $15,000 in fees, and put her at 100 percent loan-to-value," says Musci.
"She eventually had to sell her house to get out from underneath it."
Deciding on debt consolidation is a simple formula
for Greenberg: Compare your existing minimum payments to what your payments will
be for that same debt under the DMP, including fees and voluntary contributions.
If the latter doesn't save you 5 percent to 10 percent, it's the wrong choice.
8. DMP helps your credit rating.
The
second question Greenberg asks before signing with a DMP: Is your credit rating
pristine? If you've managed to pay your bills on time to this point, know that
this step will muck up your credit history. The home equity line might make more
sense here, Musci says. On the other hand, if you've missed
payments and it already shows on your report, credit counseling won't make it
worse. That's when a DMP can improve some situations, as creditors sometimes applaud
your finally taking steps to handle debt appropriately. 9.
Bankruptcy will ruin your life.
A good credit counselor will level with
you when your situation requires this final stroke. "I've had people with
no other alternative -- they've spent years borrowing from every relative just
to make ends meet. They're on a fixed income, usually elderly," Greenberg
says. "Having to deal with bankruptcy in their background is a better alternative
than going without food and shelter." 10.
Bankruptcy is no big deal.
Bour has talked to an amazing number of people
in their 20s who filed bankruptcy for a $7,000 debt. "It's ridiculous because
the damage will linger long after whatever the $7,000 debt was for," he says.
Bankruptcy is an extreme solution, reserved for cases like someone on a $20,000
annual salary with a cumulative credit card debt of $50,000 or more. If
you file Chapter 7 -- exoneration of all debt -- the window is nearly 10 years.
With Chapter 13 -- reorganization of debt -- that seven-year clock starts ticking
after you pay off the debt. So if you need five years to get back on your feet,
assume this cloud follows you for 12 years. Employers look
at credit reports, and occasionally refuse to hire based on what they find. If
you deny bankruptcy on many forms, you can be held accountable later for lying
on an application. Insurance companies can deny coverage as well. In
the end, debt management resembles weight loss: No one can do it for you, and
the process takes four to five years on average. "There's no panacea,"
says Greenberg. "You have to buy into the process and really work to reach
the goal."
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