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(continued
from previous page) 10 debt
consolidation myths
By Julie
Sturgeon • Bankrate.com
5. Debt settlement is the cheapest way
to go.
Greenberg urges anyone introduced to a debt settlement
program to run hard in the opposite direction. "First of all,
it's unethical," he says. "It's just wrong to make payments
on an account and have the money sit in someone else's pockets until
the creditor gives up on the collection calls." The real skunks
insert a clause in the contract that says if you miss a payment
to the debt settlement company, it keeps all the money in the ante
as a fee.
Secondly, this route dings your credit history severely,
as all those "pay us now" letters count against you, not
the company. Finally, the amount the creditors forgive in the end
is considered income for you, and you owe taxes on that amount.
"If you're going to take this route, you might as well declare
bankruptcy," Greenberg says.
6. You need a formal program to get out
of debt.
Many creditors will enroll you in their special
reduced-interest programs if you approach them as an individual.
The pain comes in making all those phone calls and knowing what
to ask for.
Home equity lines don't require third-party guidance,
nor does refinancing your first mortgage to get your hands on a
lump sum of cash. On the flip side, these options still require
spending discipline on your end lest you wind up with a mortgage
payment, home equity line invoice and another $10,000 credit card
debt six months down the road. This time, your house is on the line.
7. Debt consolidation always
saves you money.
Better ask a calculator to determine the truth
of this statement for your situation. For example, if a lender assures
you it can secure financing with no out-of-pocket costs, that doesn't
mean it's a kinder, gentler source of funds. It's code for "We're
rolling our fees into your loan, where they are also subject to
the interest rate."
The truly unfortunate fall victim to flipping -- a
process that ruined one of Musci's elderly clients. A lender offers
a debt consolidation loan plus cash out, with no out-of-pocket fees.
A year later, it calls again to say that since your home has appreciated,
could you use more cash? Say yes, and they again sock you with fees
hidden into those monthly payments. This cycle continues until you
break.
"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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