Credit Score Perils of Debt Consolidation

What happens to your Credit Score in Debt Consolidation?

A bad economy is a boom for the debt consolidation industry, which has a reputation for being non-profit, preventing bankruptcy, and fighting for the little guy. But there are some nasty side effects you should know.

The Four Big Problems with Most Debt Consolidation Programs

1. For the first six to eight months of a 24-month program, 100 percent of your payments can go to fees (the fee period). After this fee period, you still pay a monthly management fee for the rest of the program. Sure, your creditors are aware you’re in a debt program at first, but that means nothing. They’re not legally obligated to wait until your fee period ends or stop collections. Fees and interest still accumulate.
2. NO NEGOTIATION. Your creditors are left in the dark and ignored by your debt managers. This disconnect is terrible for them and you. As a result, your creditors don’t stop collection attempts. The phone calls and letters keep coming. They even sell the debt to collectors who can get more aggressive in their collection attempts.Liens, lawsuits, wage garnishment, and asset seizures can still occur during the fee period. Some debt consolidation programs will charge you an extra fee to intervene at this point, but it may be too difficult and too late.

   When your fee period ends, you must help the debt consolidation company identify which collection agency bought your debt. It can go from your creditor to several collectors during your fee period.

3. CATASTROPHIC CREDIT SCORE. Your credit score goes from bad to disastrous because there are no payments or negotiations with your creditors during this fee period. And it takes a lot longer to regain an average credit score. Why? Because during your fee period, your creditors and collectors continue to report even worse negatives on your credit reports. In some cases, your credit score recovery is faster from a bankruptcy filing than waiting until a debt consolidation program ends. Naturally, everyone’s situation is different, and I’m not necessarily recommending bankruptcy.
4. TAX PROBLEMS. In some cases, creditors must file a tax gain on your debt reduction from a formal debt management program. Imagine saving $10,000 in your debt program with a $4,000 tax bill. Ugh!

Strongly consider your options before you enter a debt management program.

As an alternative, I recommend the SmartCredit.com Action Buttons.

Use the Action Buttons to negotiate directly with your creditors to reduce each of your debts or ask to defer several months of payments. The Action Buttons work fast and put you in direct control.

David B. Coulter – founder and CEO of SmartCredit®

Categorised in: Credit Score, Debt, Debt Consolidation, Money & Identity

This post was written by David B. Coulter