I was listening to a radio talk show the other day that featured a financial guru – a person who was an expert on personal money management, including debt. One caller described himself as 70 years old with a daughter and son-in-law who are $90,000 in credit card debt. He said the interest on their credit card debt alone was $2500 a month and that their income was only $2,000 a month. This caller said he thought he would take out a mortgage on his house in the amount of $90,000 and make them a loan at 2.5%. He wondered if this was a good idea.
The financial expert said he thought this would be good for the children but that the caller was being too kind. He suggested instead that the man tell his children to get consumer credit counseling. He even provided the gentleman with the Internet URL of an agency he thought could be helpful.
I knew that the financial guru was trying to be helpful but I thought that this was very bad advice. Here is the problem. Consumer credit counseling can do nothing to reduce that $90,000 of credit card debt. A credit counselor could help this couple develop a payment plan and maybe even get some of the credit card companies to lower their interest charges. But that’s all. So let’s consider the math. For the sake of example, we’ll assume that a credit-counseling agency could get their interest rates reduced to an average of 5%. Let’s also assume the couple and the counselor decide they could pay $500 a month. Do you want to guess how long it would take to pay back the $90,000? It would take 27.8 years to pay off all their debt and the interest – even at 5% – would total $76,702. And if they could afford to pay only $400 a month, they would literally never get the debt paid off because that would not be enough to cover just the interest.
A debt consolidation loan
As you should be able to see from this example, a debt consolidation loan would also not be helpful. In fact, a debt consolidation loan might be totally out of the question as it would probably not be possible for them to borrow the $90,000 – given their combined incomes. If they could, they would run into the same problem as with credit counseling in that it would take them much too long to pay back the loan.
File for bankruptcy
In this case, the couple’s best bet might be to file for bankruptcy. This would allow them to discharge (eliminate) all of their credit card debts so they would have a fresh start. However, bankruptcy does come with some pitfalls. For one thing, a bankruptcy would stay on their credit report for 10 years and this would be 10 long years during which they would have a hard time getting any new credit. They would have to surrender their credit cards, which in this case might not be a bad idea. However, they might lose some of their possessions and a chapter 7 bankruptcy, which is the most popular, will not discharge some debts such as student loan debt and alimony and child support.
A better alternative in debt consolidation
A fourth and perhaps better alternative would be to let us settle their debts. Our debt counselors could get their debts reduced as much as possible – probably by thousands of dollars – and help them develop an affordable payment plan that would get them out of debt much faster than either a debt consolidation loan or consumer credit counseling. Debt settlement would have a negative effect on their credit score but it wouldn’t be as bad as if they filed for bankruptcy. Plus, it’s a way to pay back some of what they owed without “stiffing” the credit card companies altogether.
If you find yourself in the same kind of trouble as this young couple, don’t hesitate. Call our toll-free number to get immediate help. It really could be your best debt consolidation alternative.