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Cautionary Tales of Credit Consolidation

Updated: Dec 2, 2020

As a bankruptcy attorney, I have met many people who tried to resolve their credit card debt by attempting some form of “consolidation” of their credit cards through a third-party company. This consolidation usually means that instead of making monthly payments to each different credit card company, you begin making one payment to the consolidation company who either splits up that that money and distributes it amongst the credit card companies you owe or they attempt to negotiate a settlement of your debts over a period of time.

The latter is the most common among the people I represented, and I believe that it is because it is the least successful. In this “Settlement Consolidation” the consolidation company is putting your monthly payments aside and saving it up for an eventual settlement but in the meantime your creditors are not getting paid. Your credit score swiftly plummets for falling behind on your credit cards payments.

The biggest issue with the Settlement Consolidation is that it can take too long to save up enough money to settle out all of the debts causing the creditors to lose patience and file a lawsuit, which can then result in judgments, garnishments, liens, etc. Most people do not understand why they are being sued when they are faithfully making their payments to the consolidation company each month. It becomes even more frustrating when they realize the consolidation company is unable to do anything to stop the lawsuit and the only option for most people is to file for bankruptcy.

This sequence of events is extremely common amongst my clients and the most common lament is that people wished they had considered bankruptcy from the beginning instead of wasting their time and money with credit consolidation. Keep in mind that my perspective is skewed by my clientele, but it is feedback worthy of passing on and heeding.

There is a better form of consolidation available, one that does not expose people to lawsuits and tarnished credit. The “Adjusted Payment Consolidation” is one where the consolidation company is forwarding your payments to your credit cards each month. Instead of attempting a negotiating settlement, they have credit card companies who work with their program and will accept a reduced payment, which provides relief for individuals from a short-term perspective. The problem with this type of consolidation is that with such small payments, the principal balance of the debt is not being paid down in any meaningful way. People have described this type of program as being on a hamster wheel. They are making payments each month, but their debt isn’t going anywhere. This makes this program ideal for someone who is experiencing a temporary financial hardship.

Before hiring a credit consolidation company it is important to know if it is a Settlement Consolidation or a Adjusted Payment Consolidation and understand their limitations as explained in this post. I would also strongly recommend making an appointment for a free consultation with a bankruptcy attorney. If you are eligible for a simple, routine Chapter 7 bankruptcy case then you may very well be better off seeking that type of relief as opposed to a credit consolidation.


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