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What happens when debt consolidation goes in the wrong direction

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What happens when debt consolidation goes wrong
By Liz Weston, CFP(r) Senior Writer | Personal Finance economics, credit scores Liz Weston, CFP(r), is a personal finance columnist host of"Smart Money," the "Smart Money" podcast an award-winning journalist, and the writer of 5 books on financial matters, among them the bestseller "Your Credit Score." Liz has appeared on numerous national radio and television programs, including the "Today" show "NBC The Nightly News,"" the "Dr. Phil" show and "All things considered." Her columns are carried in the media by The Associated Press and appear in hundreds of media outlets each week. Before joining NerdWallet, she was a writer for MSN, Reuters, AARP The Magazine and the Los Angeles Times. She shares a home with her family in Los Angeles with a husband, a daughter and a golden retriever that is co-dependent.





Jul 20, 2017


Edited by Des Toups Lead Assigning Editor | Student loans repayment of college debt, paying for college Des Toups leads the student loans and auto loans teams at NerdWallet; before that, he was the head of the personal loans as well as consumer finance departments. He also managed editorial team members on CarInsurance.com, Insurance.com and MSN.com and was an editor and reporter at The Seattle Times, Anchorage Daily News, Albuquerque Journal, Colorado Springs Gazette-Telegraph and Biloxi Sun Herald.







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Daniel Montville knew a debt consolidation loan wouldn't solve his financial issues, but the hospice nurse believed it could give him some relief. He had already filed for bankruptcy once, in 2005 and had a firm resolve not to repeat the mistake.
Montville was able to take out the loan in 2015, but within a year, he was been in debt on the loan and on the payday loans he got to aid his daughter, an unemployed mother of four children. The payday lenders eliminated his bank account every time a paycheck came in, leaving little money to pay for the essentials. His daughter was fired from her job and the $5,000 tax refund she promised him in exchange for repayment was used to her children.
"That's the moment I woke up and realized that this was not a win-win situation," says Montville, 49, from Parma, Ohio. Montville is currently paying back his creditors under a 5-year Chapter 13 bankruptcy repayment plan.
could be a response to a struggling borrower's prayer however, it doesn't always solve the issue of overspending that led to the debt initially. In a short period of time the borrower is often buried deeper in bills.
"It's an easy fix," says Danielle Garcia an expert in credit counseling at American Financial Solutions in Bremerton, Washington. "They don't address the root of the issue."
From the skillet
The five-year, $17,000 loan Montville got through his credit union, for instance, paid off 10 high-rate credit card debts, cut the rate of interest on the debt from double figures to around 8% and offered a fixed monthly payment of $375, less than what he had been paying in total on the credit cards.
What the loan didn't do but change Montville's habits of spending. Repaying his credit cards just gave him more space to make charges.
Some of the debt came due to unexpected expenses, such as car repairs. However, Montville estimates 60% of the debt was a result of "foolish expenditure."
"I wanted to own a television. I needed clothes. I want to see a film," Montville says. When he got a new laptop, he noticed only the low monthly payment of $35 and not the 25percent interest rate that he was being assessed. When his daughter was in financial difficulties, he resorted towards payday loans because his cards were maxed out.
Now that he can no more borrow money credit -the credit card accounts have been shut and he'll require the bankruptcy court's permission to purchase a new car- Montville finally is thinking about what he really requires to buy and what he would like to purchase. He considers whether he can make a decision without making a purchase or put it off. If he truly would like something, he sets aside money for it.
"My impression is that I should pay cash only," Montville says. "Once I have paid cash, nobody can take it from me."
Consolidation is a strategy is not a solution
Montville's attorney Blake Brewer, says many of his clients don't have any notion of how their expenditures stack up against their income. They think that their forthcoming tax rebate or a stretch of overtime will help them catch up, without realizing they're spending far more than they earn.
"These people are just shocked when I sit down with them and pull out a calculator,"" Brewer says.
Some of his clients consolidated their debt using the 401(k) loan or a home equity line of credit. They are proud of their savings money because they lowered their interest rates, but they aren't aware that they're spending assets -- retirement accounts and home equity -- that normally are protected against creditors when they file bankruptcy courts.
People seeking debt consolidation also can wind up with , which promise to persuade creditors to settle for less than they're owed. The process of settling debts typically results in a major hit on credit scores, but the success of this method isn't always guaranteed. Some companies simply disappear with the hundreds of dollars they demand.
Through the credit union or reliable online lender don't have to be a disaster if the borrowers:
Stop using credit cards.
Set an annual budget
Reserve money for emergencies so that they don't have to borrow to pay for the unexpected expenses

The most important thing is that their debt has to have the ability to be repaid within the three- to five-year period of the typical debt consolidation loan. If it will take more than five years to pay off the debt by themselves, borrowers must consult with a .
"By the time the majority of people look for assistance they're already too in the hole," says Garcia, the credit counselor.
Liz Weston is a certified financial planner and columnist at NerdWallet which is a personal finance website, and author of "Your Credit Score." Contact: Twitter: @lizweston.
The piece was co-written by NerdWallet and was originally released through The Associated Press.



Author bio Liz Weston is a columnist for NerdWallet. The author is also a registered financial planner and author of five books on money which include "Your Credit Score."







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