JGS Group

First what is a standard debt consolidation loan? This is when you utilize something of high value that can be used as security to attain a loan, in most cases debtors use the equity in their home. Initially this may look like a simple and easy choice to manage a serious and potentially out of control debt situation. You simply aquire the debt consolidation loan enabling you to pay all your debts and then only have one monthly payment, instead of issuing out multiple monthly payments to different creditors throughout the the course of the month.

Now let’s take this situation and put it under the microscope. First, this is known as ‘debt transformation’ a way of moving debt from one place to another. In reality what you did was transform your lower risk unsecured debts into high risk secured debt. This is where the real problem occurs, because if you experience financial difficulties again they can take your house away. Most debtors do not seriously consider this scenario when taking this approach. People think they have found an answer to their problem by using the equity of their homes to pay off debts, but in reality are setting themselves up for a much larger problem.

Debtors pay off their cards through the debt consolidation loan secured courtesy of their home and now have no balance on these cards. But still leave one card open with the highest credit limit just in case. Using credit cards (plastic) for many debtors is an underlying subconscious addiction, credit card junkies, and the disheartenting fact is many people are in denial about this. Numbers have shown that after five years 80% of people who utilize this method of debt relief end up with the same credit card debt problems but the second around they have an extra secured payment against their home and run the risk of having to go bankrupt or get foreclosed upon.

What happens next is you take a peek over your shoulder only to discover a big mountain of credit card debt behind you only to speculate how in the world this happened all over again. 95% of the time it started from that loney credit card you kept out just in case. Shortly thereafter the credit card companies view you as a high credit risk and increase your APR up to 29% or more. Once the interest is increased your monthy minimum payments double and possibly even triple.

At this point you are trapped back in the middle of the unforgiving credit card treadmill, however you have a second mortgage that must take precedence over the credit card debt or potentially risk your home being foreclosed. In this situation now you do not have any equity to do it again and your debt to credit limit ratio is too high to get any sort of loan, going bankrupt becomes the simplest way out of this mess. However filing for bankruptcy will mark a very damaging scare on your credit report.

I have spoke with thousands of consumers over the past 19 years who have done just what I described in the previous paragraphs. Everyone has the exact same thing to say. They thought they were going to be able to handle it and did’nt foresee themselves ever getting back into credit card debt again and wished they had someone who would of campaigned against making the move towards a debt consolidation loan.

For many who were trapped in this situation the smartest decision at that time would have been to consider debt settlement. Even though through settlement the credit score will be lowered it is the fastest way to become free of your debts while at the same time saving a vast amount of money on what is owed.

Steve Bis is a debt analyst with the US Consumer Advocate, which practices debt relief.

- Steve Bis