Debt Consolidation Mistakes to Avoid

The old saying is that if something sounds too good to be true, it probably is. Many consumers saddled with debt have found out that the promises made by most debt consolidation companies are simply too good to be true.

Those companies promise to take the money you owe and almost magically make half of your debt disappear or claim that all your debt can be paid off with low, easy monthly payments.

It sounds good until you read the fine print. Unfortunately, too many people sign contracts with debt consolidation companies without reading the entire contract. For those consumers, the devil is in the details. Debt problems get worse rather than better because they leaped into unfavorable agreements before learning about the three debt consolidation mistakes to avoid:

Making a Bad Situation Worse: Debt Consolidation Companies

You can hear their ads on radio or see them on TV. You are urged over and over to act quickly to get your debts reduced and then paid off in low monthly payments.

The urgency is real: these companies want you to act before you look into what they're really offering. The reality is that these companies typically have a high fee built into your "easy" monthly payments. That fee is typically 10 percent or more of the payment you send them every month.

Many times, debt consolidation companies simply hang onto your money, withholding payments to creditors on the assumption that creditors will then be more eager to negotiate attractive terms on your outstanding bills. While this assumption might be accurate in some cases, there's a heavy price to pay, often consisting of non-stop harassment from bill collectors and sometimes wage garnishments and lawsuits.

By the time the debt consolidation company begins to pay off your debts with the money you've been sending them, many months and even years can have gone by.

Easy Money: Hard Lesson

A lot of debt consolidation "experts" will tell you that debt consolidation loans are easy to get. But if a person needs a debt consolidation loan, it's not unusual for that person to have a poor credit rating, making an affordable loan difficult or impossible to get.

What you might get instead is what's known as a hard-money loan. While it's true that it's easy to get this type of loan, it's just as true that's it's hard to pay it off. Interest rates on hard-money loans are often 20 percent or more. You wind up paying many times the original debt in interest alone.

Juggling Credit Cards

Another mistake to avoid when trying to get rid of debt is the juggling of credit cards, transferring your balance from one new card to another, trying to take advantage of low-interest cards. The problem with this tactic is that it is quickly discovered by the companies compiling credit reports and credit ratings: the constant transferring of balances can drop your credit score like a rock.

And if you don't pay off the debt on the card while it's at the low, introductory interest rate, your debt can go up before you transfer your balance again.

In the end, you can wind up unable to get a decent credit card at a decent interest rate, and you're saddled with more debt than ever.

Viable Options

If you find yourself tempted to try one or more of these routes to debt consolidation or debt relief, contact a Texas bankruptcy attorney who will explain the advantages and disadvantages of Chapter 7 and Chapter 13 bankruptcy. A bankruptcy lawyer will examine your financial situation and help you understand bankruptcy, debt consolidation and foreclosure.