Debt Consolidation Programs Treat the Symptom(s), Not the Cause

Posted by William Kain on March 20, 2014 at 8:30 AM
William Kain

debt consolidation programsFor many debtors, debt consolidation programs do not work. In fact, many people who file bankruptcy have already tried to resolve their debt problems by contacting one of the many debt consolidation programs that are advertised. These companies claim that they can resolve debt problems for pennies on the dollar, when in fact they are more concerned about making a profit than finding real debt solutions for their clients.

Symptom: High Credit Card Debt | Cause: Income Loss

For example, Paul* came into our office after working with a debt consolidation program, in a worse financial condition than before he hired this debt consolidation company. The debt consolidation company agreed to contact each of Paul’s unsecured creditors and negotiate a reduced payoff for each debt. Paul agreed to pay a monthly payment of $400 that would be pro-rated among all of his unsecured creditors. What he failed to realize, because the debt consolidation company failed to adequately explain, was that his creditors were not required to participate in the program. Two of Paul’s creditors proceeded to file lawsuits to collect the debts, which resulted in judgments being placed against his home. Furthermore, the company did not adequately disclose that before any creditors were paid a 33% fee would be deducted from each monthly payment for services rendered. Paul now owed more money than he did prior to hiring the debt consolidation company, because he continued to use other credit cards to help pay his expenses and the $400 per month payment.

In Paul’s experience, the debt consolidation program did not work. The first problem is that the program was trying to treat the symptom, without treating the cause. Paul’s hours at work had been reduced and he no longer had sufficient income to pay his debts while maintaining a minimal standard of living. He turned to us during this time of despair. Paul easily qualified for a Chapter 7 bankruptcy that wiped out all of his unsecured debts, giving him the fresh started he needed to regain control.

Debt consolidation programs almost always treat the symptoms, in this case high credit card debts, without treating the cause, Paul’s loss of income. A Chapter 7 bankruptcy treated both by giving Paul a fresh start so that he could begin rebuilding his personal finances. The bankruptcy was also able to void the judgments against his home so that he did not need to worry about losing his home to judgment creditors.

Symptoms: High Monthly Payments | Cause: Unexpected Medical Expense

Debt consolidation programs that “refinance” unsecured debt are also not the best alternative to resolve debt problems. Jane and Eric Cobb* had several credit cards and personal loans to pay each month; the monthly payment of these combined debts was higher than their mortgage payment. A debt consolidation company advised the Cobbs to refinance their unsecured debt so they would have one lower monthly payment. The Cobbs agreed and paid the company almost two thousand dollars in fees and costs (all financed into the new loan, of course) to combine their unsecured debts into one monthly bill. While the payment was lower under the consolidation loan, the interest rate was very high. Because they had extended the debts into a 15-year loan to have a lower monthly payment, the Cobbs were going to end up paying far more in interest than if had they continued to make their monthly payments.

Again, the debt consolidation program treated the symptom rather than the cause. The symptom was that the Cobbs monthly payments added up to be more than their monthly income. The cause was an unexpected medical bill due to a surgery their insurance wouldn’t cover. The Cobbs could afford to pay some of their debt but they needed a plan to reorganize that debt into a manageable monthly payment. By filing a Chapter 13 the Cobbs were able to pay their unsecured debt through the Chapter 13 plan with no interest over a five-year period. At the end of the bankruptcy plan, the remaining unsecured debt will be discharged and they will only be responsible for the secured debt on their home. Additionally, they were able to include their car loans in the Chapter 13 plan to lower the interest rate they were paying on these loans. The Chapter 13 bankruptcy solved both the cause and their symptom.


Debtors can skip over the failure of debt consolidation programs by simply talking with a bankruptcy attorney to discuss their options. Bankruptcy gives debtors a fresh start so that they can begin rebuilding their finances for a stronger financial future. Before making a debt solution decision, know your options. Download the free “Truth About Debt Consolidation eBook” to learn more about the intricacies of debt consolidation programs and what other options you have:

Download our Free eBook on Debt Consolidation


*Names have been changed to protect the privacy of individuals.

Topics: Debt Consolidation, Personal Experiences

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