Debt settlement companies and consolidation loans look like a lifeline when you’re staring a 5-figure debt load in the eye. But this is rarely the case. In fact, most people only end up prolonging their indebtedness and adding unnecessary fees and costs to the effort to find financial freedom.
As this article from The Grand Junction Daily Sentinel shows, these services are often little more than a costly waste of time.
Data collected from Colorado’s 42 registered debt-settlement and debt-consolidation firms showed that fewer than 10 percent of consumers who signed on with these companies between 2006 and 2008 had paid off debt or completed agreements.
One reason these services don’t work is because they’re simply disreputable and out to take your money and run. The article references some of the hazards of dealing with many debt settlement companies, some of which I wrote about Debt Consolidation and Your Credit Score. The biggest red flag is by far a plan that tells you to stop paying your creditor.
Another common problem is that the customers pay the debt consolidation company the monthly payment, but the company fails to pass a portion on to the creditor. It not only racks up the debt they’re trying to pay off, but ruins their credit score in the process.
Let’s leave aside the excessive fees, and damage to your credit score for a minute and return to that quote for the newspaper article:
…fewer than 10 percent of consumers who signed on with these companies between 2006 and 2008 had paid off debt or completed agreements.
This pretty much confirms that these programs don’t really solve the problem they portend to solve. But I think a major reason that debt settlement programs don’t work is that they don’t address the root cause of being in debt in the first place.
Debt consolidation loans can be a great tool that enables you to get your debt into a more manageable configuration, but if you still spend more than you make and live beyond your means, never saving for any potential emergency then you only going to find yourself in the same place further down the road.
Consolidation don’t work because you’re not paying off the debt. You’re just renaming it and moving it around. The debt is still there.
I hear what you’re saying bondage, but it can work provided that you pay down the debt after you’ve shuffled it around. The problem most people make is to get caught in the consolidation shuffle and just keep moving it around… until they run out of offers. Of course, they also usually keep spending and piling even more debt on top in the process… but it can be a useful tactic, if done right.
[...] is a good idea, and why debt consolidation is (sometimes) a scam. When it’s not a scam, debt settlement and loan consolidation just doesn’t work, and you’re much better off taking a DIY approach to debt [...]