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Debt consolidation is combining outstanding loans (debt) into a single package (consolidation). The debts therefore become one “new” loan, and instead of making several small payments on the loans you used to have, you make one larger payment on the new loan. Occasionally people ask whether debt consolidation is a good, economically constructive solution to credit card problems. Usually, the answer is that it is not. Certainly not as a solution all by itself. This article discusses some of the drawbacks of debt consolidation.
Debt consolidation is combining outstanding loans (debt) into a single package (consolidation). The debts therefore become one “new” loan, and instead of making several small payments on the loans you used to have, you make one larger payment on the new loan. Ideally and typically—and what has made debt consolidation loans popular as a home remedy for debt—the new loan is secured by some asset, often your home, and this allows you to obtain lower interest rates. Thus consolidation, in the final analysis, is the conversion of debt that is not secured into debt that is secured by some real asset, in exchange for lower interest rates. It can reduce your monthly payments considerably, and of course that could be very helpful.
It also converts “old” loans into new loans, giving them a new statute of limitations (new life for loans that could be at or near their time of expiring). And it can even turn loans with short statutes of limitations into loans with long ones).
Why Doesn’t Debt Consolidation “Work?”
As a pure financial transaction, exchanging a lower interest rate for a security arrangement can be a very reasonable decision. Why then has it been such a disaster for so many people? Risk. Most people entering into complex financing are not able to assess risk and account for it, particularly when they are under economic pressure—which they usually are when they consider debt consolidation loans. Thus people systematically underestimate the risk that they won’t be able to make the payments on the new debt.
Additionally, since most people do not really want to go into debt in the first place, the existence of large credit card debt is indicative of other problems, either too little money or a tendency to overspend on unnecessary items. These issues are more likely to be made worse by the sudden reduction of economic pressure and the sudden, apparently greater amount of money or credit available to be spent.
In addition to these “systemic” issues, there are two other main hidden costs of consolidation that should be considered: loss of flexibility, and the nature of secured debt versus unsecured debt.
When you have ten loans for different things, from automobiles to credit cards, you have flexibility if hard times strike. If you simply cannot make your payments, you can give up some, but not all, of the things you have purchased. You can let some, but not all of the credit cards go into default. This is certainly not a happy thing, of course, but it raises the possibility of individualized debt negotiations, debt forgiveness, or even missed statutes of limitation. Again, these are not the choices and hopes of someone in flush economic conditions, but they are real options facing many people right now. In order for a debt collector to start garnishing your wages, it must find and sue you, must win, and then find your assets. It is an expensive and risky process for the debt collector if you fight. They sometimes drop the ball, and there are limits to how much of your wages can be garnished.
If everything else fails for you, you can declare bankruptcy, where homestead exemptions are likely to allow you to remain in your home.
The bigger risk of debt consolidation loans is the nature of secured, versus unsecured, debt. Remember that what powers the lower payments for consolidation is the existence of security—usually your home. Your home secures the debt, and that means that if you do not make your payments on the new debt, the lender can foreclose on your home and take it away. Foreclosures are generally “expedited” proceedings, meaning that your defenses are limited and the time for asserting them is restricted. In many states foreclosure is not even a judicial proceeding, although you have some legal rights you could assert in certain circumstances.
And what all that means is that instead of facing the prospect of years of battling over high-risk debts and questionable payoffs that could be trumped by bankruptcy, the banks can waltz into court and emerge in a very short time with your house. Put a little differently, your debt consolidation loan could make you homeless almost before you know it. And bankruptcy often, if not usually, will do nothing to protect you from it.
Anyone considering debt consolidation should think about these risks very carefully.
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The Fair Debt Collection Practices Act (FDCPA) is a source of many protections against “unfair” debt collection practices. It enumerates many of these practices but leaves room for more general use of the law, too. This article discusses three specific violations as examples of what the law can do.
The Fair Debt Collection Practices Act (FDCPA) is a source of many protections from ruthless debt collectors for people who owe money. As I often point out, what makes the Act so powerful is that, in addition to making certain specific actions illegal, the FDCPA also more generally makes <i>any unfair, oppressive or deceptive collection practice illegal.</i> At the focus of this article, however, are three specific forms of communication designed to embarrass debtors
Debt Collectors have particular rules when trying to find you to bug you for money.
Under 15 U.S.C. Section 1692b, a debt collector looking for a debtor must identify himself by name but not mention his employer unless specifically requested. He cannot state that the consumer owes any debt, and he cannot communicate more than once with any person unless requested to do so or unless the debt collector reasonably believes that the earlier response of that person was erroneous or incomplete, and the person now has correct or complete location information.
This portion of the law was obviously intended to end the practice of collectors harassing and annoying the people around the debtor for purposes of damaging relationships and creating social pressure on the debtor.
Collectors are not allowed to communicate with consumers <i>“at any unusual time or place”</i> or at a time or place known to be inconvenient to the consumer. Unless the debt collector actually knows that the consumer has unusual hours, he cannot call before 8:00 a.m. or after 9:00 p.m., local time of the consumer. 15 U.S.C. Sec. 1692c(a).
If you are being contacted at work, therefore, you should tell the collector that this is “an inconvenient time and place” for communications. It is also specifically illegal for a collector to call at place of work if he knows or has reason to know that the employer prohibits the consumer from receiving personal communications. If you work on a late shift, you should tell the debt collector what hours are inconvenient to you. It obviously makes sense to communicate with the debt collector in writing, although the law doesn’t require it, and to make records of any communication that comes outside of the specified hours.
Collectors are not allowed to talk to other people in connection with their collection efforts other than as specifically allowed (regarding finding you) unless you give your prior consent, or unless a court gives that permission. However, they are permitted to talk to your attorney, a consumer reporting agency, and the creditor and its attorney. The big exception involves “post-judgment judicial remedies.” If the debt collector obtains a judgment, it may seek garnishment of wages or bank accounts, and it is permitted efforts that are “reasonably necessary” to obtain these remedies. 15 U.S.C. Sec. 1692c(b).
I believe this section prevents debt collectors from harassing people who refuse to give them information about your whereabouts or to cooperate in other ways. Again, the prohibition exists to prevent the wanton damage of a consumer’s relationships with other people.
If debt collectors are engaging in any of the above-mentioned prohibited acts, they are violating the Fair Debt Collection Practices Act, and you can either sue them for it or, if they have filed suit against you, make a counterclaim against them.
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