Wednesday, December 14, 2011

Why You Shouldn’t Fear Bankruptcy: Why Debt Consolidators Might Not Be Your Best Option.

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The Basics: Despite the hype for debt consolidators, under certain conditions, bankruptcy may be a better option, for those who can accept the consequences.

As one who has had a bit of financial hardship as an adult, I think I have a valuable perspective for those feeling the crushing weight of debt while being only marginally employed.

As a college educated person, one of the things that is very generally reinforced in our society is that with education comes opportunity and greater success. And yet, in today’s day in age, I’ve found no social stigma more widely spread among college and post-grad educated people as the prejudice against bankruptcy and those who have declared bankruptcy in their lives. I know, because as a college-educated person, my peers are often astonished when I openly admit that I’ve declared bankruptcy. Twice, in fact. The astonishing thing is that few people ask the follow-up question: “Why?” The answer is the difference which should make all the difference. In my case, my first bankruptcy was from a stack of medical bills after college when I abruptly got seriously ill and within a month, the hospital turned my bills over to a relentless collection agent (ironically, the hospital went under a month later). Then, five years ago, my wife abandoned me (and our two cats), leaving me with a hefty mortgage, car bills, etc. at a time when the collectibles market (which was my primary income source at the time) collapsed. Medical bankruptcies and bankruptcies from failing businesses are two of the biggest causes of personal bankruptcy in the United States.

Society tells me I should be ashamed of myself for failing so spectacularly and going bankrupt, but I don’t. There are two reasons for that: first, despite annoying changing laws, two years back when I declared it was an excellent time to declare bankruptcy, and second, debt consolidation services were unable to help me. On the first point, it was actually my mother who convinced me that declaring bankruptcy was my best chance of keeping anything (except a credit rating and the albatross of a house); with the banking crisis and the mortgage lending crisis, it was people like me who were being victimized by the banks, she observed. As well, optimist as she is, she pointed out that because I was declaring during a national financial emergency, when the economy improved there was a greater likelihood that consideration could be shown by lending institutions.

But what troubled me, as a generally responsible citizen (even if I’m not a capitalist, I do try to meet my obligations), was that for all of the hype over the last few years for debt consolidation services, there was nothing my local debt consolidation service could (or would) do to help me. I contacted the debt consolidation service and made an appointment for the consultation. The consultation was free and I’ve yet to encounter a debt consolidator that does not look over your bills and determine if you qualify for free. So, one thing you should know is that any decent debt consolidation service is going to listen to your case and look over your bills for free.

The debt consolidation service I went to required that their clients have at least $10,000 of debt, which thanks to my mortgage, I was well in the clear for. So, another thing those considering debt consolidation services ought to know is that most are looking to help people who are in the most dire straits. Those who might be feeling pressure over credit card debt, for example, might do better to contact the credit card companies and see what you can work out. Credit card companies want something and faced with getting nothing, most are more flexible than they initially appear.

But, like credit card companies, debt consolidation companies are a business and their business is to make money . . . not just help people out. The concept of a debt consolidation is that if all of your bills are combined, they may be reduced together with the promise of regular payments at a lower amount of interest than one is currently paying. So, in a hypothetical example, if you had three credit cards and had maxed them all out to $10,000 each, if one was a 5.5% interest rate, another was 6.9% and the third was 8.2%, a good debt consolidator would negotiate with the three companies and you might pay back the $30,000 at 2.5% (this is very much a hypothetical). And under your new payment structure, as long as you maintained your new monthly payments, you wouldn’t be called by the credit card companies again (though you couldn’t spend on the credit cards, either).

However, debt consolidation companies also have limited reach and some types of bills are out of their ability or, apparently, purview to help with. In other words, the company you owe money to has to have some willingness to work with the debt consolidation company. While this might seem obvious, some companies do not have any flexibility in their financial schemes. To wit, when my ex and I purchased our house, we were thrilled that our mortgage company was local. We knew the people there, we visited their office, representatives from the company came to see our new house. It was all very exciting and cool. As unfortunate fate would have it, though, within three months, our mortgage was sold to two different companies and the Big Faceless Corporate Mortgage Company (which did not even have a home office on the same coast as we live on!) turned out to have about the flexibility of a loan shark or Stewie Griffin a week after loaning Brian money. In other words, when I explained that the entire market I was in had dried up almost overnight and my income was temporarily non-existent, the mortgage company’s response was “Where’s our money?” When I got a job working at a bus part manufacturer and went to the debt consolidator, the mortgage company’s response was “Where’s the money we’re owed?” (Ironically, the threat of foreclosure – which costs the mortgage company money - right before I went to declare bankruptcy did not phase the mortgage company and now my old house sits abandoned now.) The point here is that some companies live up to the stereotype of monolithic capitalist corporations that are utterly inflexible, even in the face of losing their own interests.

The further point here is that debt consolidation services cannot help everyone. They are not the financial magic bullet that many financially desperate people want them to be. They cannot save everyone or service every need. In the face of my biggest debts being non-negotiable, I made a lifestyle choice to be happy and not a slave to the economy. I quit the factory that was (literally) choking me, I earned enough money to pay for a bankruptcy and I embraced a cash-only lifestyle. It’s not perfect, but it sure beats having a phone where only collection departments can get through. The number one thing you ought to know about a debt collection service is that they are a business designed to prevent bankruptcy, but if your employment situation is precarious at best, if your debtors are not willing to negotiate, and if you can overcome the social stigma, bankruptcy may be a better option.

For other reviews, be sure to check out my index page for organized lists of my many reviews and commentaries.

© 2011, 2010 W.L. Swarts. May not be reprinted without permission.

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