Whenever you see the words “Debt Consolidation”, be careful, be very careful.

When you are up to your butt in debt, and your creditors are hounding you, it is easy to let yourself get sucked in by organizations that promise to help you fix the problem. But the sad fact is that most of the promises made by these organizations are unrealistic. Some of them are outright lies. Here is a brief review of what you might hear and the hard facts.

“Consolidate your debts into one easy payment.” Some companies offer to pay off your debts with a single loan, usually secured by your house, giving you one payment a month. Often, however, the interest rate in such loans is excessive and the “one easy” payment is beyond your means. And now your house is at risk. There are other options that you should explore before going down this road.

A Debt Management Plan (DMP) is one option worth exploring, but this field is also filled with vultures, some of whom advertise on TV. With a DMP, an organization, usually a non-profit, works with all of your creditors to stop interest and late charges in return for which you make one monthly payment to them. Presumably this payment is within your means They then take the money and disburse it to your creditors. The creditors pay them a commission, just as they would pay a collection agency.

Here’s what to watch out for with a DMP: Monthly fees for the service can be excessive. If they are over $20 a month, be wary. Also, if the organization sets your monthly payment too high and you cannot make it, the whole house of cards collapses and your creditors are right back with interest charges, late fees, threatening phone calls, the whole works. And the thing to be most careful about is the ability of the DMP organization to do what it says. Can it make deals with all of your creditors and will it actually pay them promptly? I have seen cases where the organization took the client’s money and delayed paying their creditors.

If you explore a DMP and decide you cannot make it work for you, your next call should be to a bankruptcy attorney. In many cases, some or all of your debt can be made to go away — simply disappear — and the rest can be adjusted by the court to become manageable. In this case, it is the court, not the creditor, who decides how much you have to pay and when. The only exception is mortgages going forward (back payments on mortgages can be adjusted somewhat), The House of Representatives is trying to give bankruptcy judges the ability to adjust mortgages, but the Bush administration is threatening a veto.

Last, never, ever fall for the “we can fix your credit rating” scam. The fact is that there is nothing legal that anyone can do to fix your credit rating. In fact, ironically, you may find that the best way to improve your credit rating is to file bankruptcy! This will make some things difficult for a while, but with your debts discharged one way or another, it will not be long before you can come back to the credit markets — often in as little as two or three years. I have talked to many people who give money to firms that promised to improve people’s credit ratings, with no results other than a further draining of their bank accounts. if you want to spend money on such things, hire a bankruptcy lawyer.

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