Personal Finance

The Fast Track to Bankruptcy: Debt Consolidation

I never considered legitimate debt consolidation to be very harmful to debtors but after reading this article by the WSJ I have begun to think twice about the topic.

Apparently many “debt experts” are saying that debt consolidation services are the fast track to bankruptcy. Why? Not because of anything that it will do to your credit score but because of the mindset it may put you in. Debtors, by nature, seem to have a tough time saying “no” to themselves - obviously. So when debt consolidation services offer “one low payment” many are tricked into thinking their troubles are over and slip back into the same pattern of overspending that got them into debt in the first place.

This problem is made even worse by those who think that a home equity line of credit will save them. Let me be perfectly clear about this. A home equity line of credit is the same as a second mortgage! It’s not magic money that you get because you own a home. It’s using your home as collateral to borrow even more money!

There are legitimate debt consolidation services available, but be sure to do your homework before using one. Travis Plunkett, the spokesman for the Consumer Federal of America says these programs often are rife with activation fees and monthly fees that can eclipse any savings from rate reductions. Many credit counselors are quick to endorse these programs — even when there are other, better options — because they actually stand to get a cut of whatever is paid back to creditors, as well as the fee income.

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