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 Loans
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?”
Economics
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.
The Hidden Risks of Debt Consolidation
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.
Consolidated Loans are Less Flexible
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 Nature of Secured Debt
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.
Two Hidden Legal Risks of Debt Consolidation Loans
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 Loans
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?”
Economics
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.
The Hidden Risks of Debt Consolidation
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.
Consolidated Loans are Less Flexible
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 Nature of Secured Debt
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.
Cease Communication Letters under the FDCPA
Hey there! This content is available to MEMBERS only! Consider registering for an account.
Three Things the FDCPA Makes Illegal
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)
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 Must Identify Themselves to You
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.
Debt Collectors Cannot Communicate at Unreasonable Hours
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.
Debt Collectors Cannot Communicate with Third Parties Except under Limited Circumstances
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.
Your Right to Sue Under the FDCPA
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.
Identity Theft Affidavits – Debt Collector Dirty Trick, Part 2
Hey there! This content is available to MEMBERS only! Consider registering for an account.
Debt Collector not Original Creditor
Hey there! This content is available to MEMBERS only! Consider registering for an account.
The Importance of Filing a Counterclaim when Sued for Debt
The Fair Debt Collection Practices Act – the FDCPA
The Fair Debt Collection Practices Act (FDCPA) is the centerpiece of legal protections for debtors against debt collectors. The law was passed in its essential form in 1977, and its goal was to protect debtors against the abuses of debt collectors. This article discusses what makes this law great, and some of its limitations.
The Fair Debt Collection Practices Act
The Fair Debt Collection Practices Act (FDCPA) was enacted to put an end to some of the worst practices of the debt collection industry. It’s been a very good law, but the debt collectors are still doing many of the things the law was designed to present. You may be able to sue them or prevent them from suing you..
The Debt Collection Industry
Before the act, the debt collection industry was routinely engaging in the most abusive sorts of behavior imaginable, from calling debtors at all hours of the day or night and subjecting them to streams of cursing and name-calling, to discussing their debt with children, neighbors, and employers. Debt collectors frequently misrepresented themselves as attorneys and often threatened legal action which they were powerless to initiate. And they often attempted to, and did, collect debts that either never existed or were long unenforceable because of statutes of limitation or bankruptcy.
Whatever the staid spokespeople of the debt collection industry may say, this is the background of their industry. The Fair Debt Collection Practices Act, 15 U.S.C. Section 1692, et seq., was enacted to put a stop to these extreme behaviors in 1977. Because the people intended to be protected by the act are underrepresented by lawyers, and because of the explosion of debt litigation over the past decade, many of the old abuses still continue, and as people increasingly defend themselves from the debt collectors, they develop new tricks all the time.
The FDCPA: A Pretty Good Law
Nevertheless, the FDCPA is in many ways a model piece of legislation. What makes the law so powerful is that, in addition to making certain enumerated acts illegal, the Act also more generally makes acts that are “oppressive,” “false or misleading representations,” or “unfair practices” illegal. This means that, whereas in most laws, the would-be wrongdoer is free to craft his actions around the specific language of the law and find “loopholes,” under the Fair Debt Collection Practices Act, at least, the consumer may argue that these actions are still unfair or oppressive. The Supreme Court has ruled that an “unfair” act can be shown by demonstrating that it is “at least within the penumbra” of some common law, statutory “or other established concept” of unfairness.
That’s pretty broad. The price for this flexibility, however, is that the remedies—what you get if you prove the case—are less powerful. And this may be why the practices are still occurring today.
As mentioned above, there are specific actions enumerated in the FDCPA, and these include most notably, suing on expired debts, filing suit in distant jurisdictions, publishing certain types of information regarding the debtor, calling outside of specified hours. And the list goes on. If the debt collector is acting in some highly offensive way, chances are he’s within the specific provisions of the Act. These can be found at 15 U.S.C. 1692c, d, e and f. You can find the specifics by Googling the Act or provision and determining whether the specific action you’re concerned about is within one of these provisions.
Secret Danger of Garnishment to Social Security Recipients
As I have pointed out in my video about garnishing Social Security, Social Security benefits are exempt from most forms of garnishment – the notable exception to that rule is that they may be garnished by certain government entities.
Although Social Security benefits are exempt from most forms of garnishment, I warned that they could still be attached and taken if they are in a bank account that the creditor happens to find. When bank accounts are garnished, they are held by the bank for a time to allow you to fight the garnishment. As a practical matter, you may be unable to fight the garnishment, and thus if you are having trouble paying your bills and have paid for them with an account that holds Social Security benefits, it makes very good sense to switch those benefits to another bank (not just bank account in the same bank) – because once there is a judgment against you the debt collector is bound to attempt to seize any assets in a bank they have on file for you. I realize this can be difficult or disruptive, but if you have paid an original creditor or debt collector out of an account, you must expect that account to be garnished – seized and taken away from you – if the debt collector manages to get a judgment.
If it is seized, you may or may not be able to get the money back, but there will certainly be a delay, and all the money in the account, up to the amount of the judgment, will be held by the bank and unavailable to you.
There is another danger to Social Security recipients.
Social Security recipients are often elderly or disabled, needless to say, and many of these allow other people to do shopping for them or to hold their assets in one way or another to use for their benefits. This money is held in trust and should not be available to debt collectors who are after the person who is holding the money.
Here is an example that might make it clearer. If Mary (a 70 year old woman suffering from Altzheimer’s) is being taken care of by her son Tom, Mary and Tom will frequently find it helpful to allow Tom to use Mary’s account to pay her bills. If Mary’s account contains only Social Security benefits, it should be beyond the reach of any creditor, and because the money is not Tom’s at all, it should not be reachable by Tom’s creditors in any event.
However, sometimes debt collectors will discover that Tom is paying bills using Mary’s account. If his name is on the account, or if he is permitted to write checks upon it, the debt collectors may attempt to garnish the account.
This is not as “evil” as it may first appear. From the debt collector’s point of view, how do they know what bills Tom is paying with the account? People have often tried to hide assets from debt collectors by using other people’s accounts, and the law is designed to let go after the debtor’s money regardless of whose name it is.
On the other hand, the impact of Mary’s account being seized for Tom’s debt can be devastating. Because once again the money will be held out of use for a period of time that allows the parties to prove whose money it is and whether it can be seized. During that time, the elderly person cannot pay her bills, may be evicted, or face other, life-threatening and disrupting events.
Get Legal Advice
Therefore, if you have a judgment against you on a debt you should seek the advice of a lawyer specializing in debt collection before allowing the account to be linked to you in any way. In my opinion, the risk extends beyond just having your name on the account. If you sign checks on behalf of someone else and there is a judgment against you, you may be putting this person at risk. Get legal advice and protect them and you. Better yet, don’t let a debt collector get a judgment against you.
Protect Your Rights
If you are being harassed by debt collectors and worry about paying your bills, you need to be extra alert to protect your rights. These calls are often a prelude to their suing you. Bankruptcy can sometimes be an option, yet it has very high costs. It’s worth considering defending yourself first. Membership with our site gets you our teleconferences and ecourses for free, plus gives you many other benefits. Click here for more about debt law and how we can help you.
Can they Garnish Your Social Security?
Bankruptcy Might Not be the Best Choice