Job loss, divorce, a lawsuit or another major event can turn your financial situation upside down. Debt can quickly become overwhelming when creditors tack on late charges and other fees to the outstanding balance. The resulting damage to your credit may disqualify you from getting a debt consolidation loan to pay off the creditors. Some people turn to debt consolidation companies believing it will solve their problems. However, there are pitfalls when choosing this path.
Increase in Debt
Debt consolidation companies charge hefty fees for their services, frequently thousands of dollars. You actually increase your debt load by choosing to pay through these companies rather than personally working out a payment plan with your creditors. This results in a longer period of indebtedness.
Prioritizing Debt
The debt consolidation company chooses how to prioritize the bills. Many debt consolidators put their own fees first. The debt consolidator will not make any payments to your creditors until it collects its fee in full. Your creditors may pursue court action against you for defaulting on your loans and credit card bills, especially if they have not received any payments in six months or longer.
Choosing Debts
Some people make the mistake of putting all of their debts into the consolidation program. However, if you only owe a few more payments to some creditors, then there is no reason for those accounts to go into default. Continuing to make monthly payments to these short-term debts will lessen the damage on your credit report, as these creditors will report your loans as paid off. Carefully choose which debts you want consolidated.
Career Implications
If the debt consolidation company allows your loans and other bills to go into default, then you may suffer the consequences in your career, especially if your creditors proceed with court action and wage garnishments. Your employer may reassign you to a lesser position or deny a promotion based on your credit. This problem may extend throughout much of your career. For example, if you agreed to a seven-year repayment plan with the debt consolidation company, then the defaults and court actions will stay on your credit report for 14 years. The seven-year credit reporting period starts with the final payment on the account. You may avoid court action and wage garnishments by working directly with your creditors, and then honoring your payment plan with them.
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