How debt consolidation can go wrong

  • Jul. 17, 2017 2:52 p.m.

Daniel Montville knew a debt consolidation loan wouldn’t solve his financial problems, but the hospice nurse hoped it would give him some breathing room. He had already filed for bankruptcy once, in 2005, and was determined not to do it again.

Montville took out the loan in 2015, but within a year he had fallen behind on its payments and on the payday loans he got to help his daughter, a single mother with four children. The payday lenders all but cleaned out his checking account each time a paycheque landed, leaving little money for necessities. Then his daughter lost her job, and the $5,000 tax refund she had promised to him as repayment went instead to supporting her kids.

“That’s when I wised up and realized this was a no-win situation,” says Montville, 49, of Parma, Ohio. Montville is now repaying his creditors under a five-year Chapter 13 bankruptcy repayment plan.

Debt consolidation can feel like the answer to a struggling borrower’s prayer, but it often doesn’t address the overspending that caused the debt in the first place. Within a short time, borrowers often find themselves buried deeper in bills.

“It’s a quick fix,” says Danielle Garcia, a credit counsellor with American Financial Solutions in Bremerton, Washington. “They aren’t fixing the root of the problem.”

OUT OF THE FRYING PAN

The five-year, $17,000 loan Montville got from his credit union, for example, paid off 10 high-rate credit card bills, lowered the interest rate on the debt from double digits to about 8 per cent and offered a fixed monthly payment of $375, less than what he was paying combined on the cards.

What the loan didn’t do, however, was change Montville’s spending habits. Paying off the credit cards just gave him more room to charge.

Some of the debt came from unexpected expenses, such as car repairs. But Montville estimates 60 per cent came from “foolish spending.”

“I wanted a TV. I needed clothes. I want to go to a movie,” Montville says. When he bought a new computer, he noticed only the low monthly payment of $35, not the 25 per cent interest rate he was being charged. When his daughter got into financial trouble, he turned to payday loans because his cards were maxed out.

Now that he can no longer borrow – his credit card accounts are closed, and he would need the bankruptcy court’s permission to replace his car – Montville finally is thinking about what he actually needs to buy versus what he wants to buy. He considers whether he can do without a purchase or put it off. If he really wants something, he saves for it.

“My feeling now is, cash only,” Montville says. “Once I pay cash, nobody can take it from me.”

CONSOLIDATION A STRATEGY, NOT A CURE

Montville’s attorney, Blake Brewer, says many of his clients have no idea how their expenses stack up against their income. They assume that their next tax refund or stretch of overtime will help them catch up, not realizing they’re consistently spending more than they make.

“These people are just shocked when I sit down with them and take out a calculator,” Brewer says.

Some of his clients consolidated their debt using a 401(k) loan or a home equity line of credit. They pride themselves on saving money because they lowered their interest rates, but they don’t realize they’re spending assets – retirement accounts and home equity – that generally would be protected from creditors in bankruptcy court.

People seeking debt consolidation also can wind up with debt settlement companies, which promise to persuade creditors to accept less than what they’re owed. Debt settlement typically causes a major hit to credit scores, but success isn’t guaranteed and some companies simply disappear with the thousands of dollars they charge.

Debt consolidation loans — through a credit union or a reputable online lender — don’t have to be a disaster if borrowers:

—Stop using credit cards

—Commit to a budget

—Save for emergencies so they don’t have to borrow to cover unexpected expenses

Most importantly, their debt must be manageable and payable in the three- to five-year term of the typical debt consolidation loan. If it would take longer than five years to pay off the debt on their own, borrowers should consult a credit counsellor or bankruptcy attorney.

“By the time most people go looking for help, they’re already in too deep,” says Garcia, the credit counsellor.

Just Posted

Red Deer College waiting for feds to finalize marijuana legalization

Like businesses, Alberta and municipal governments, Red Deer College is waiting for… Continue reading

Class size only part of the problem say Central Alberta teachers

Though the Alberta auditor general’s report points out that classroom sizes continue… Continue reading

Lacombe County promoting crime prevention measures

County pushing Crime Prevention Through Environmental Design principles

Red Deer doctor concerned about patient transfers to rural hospitals

Family physician says the move creates less incentive for expansion at Red Deer hospital

Fire permit season begins in March

Earlier springs in last few years prompted Alberta government to move up fire permit season

WATCH: Red Deer’s River Bend upgrades officially open

River Bend Golf and Recreation Area is the latest venue to be… Continue reading

How to keep local news visible in your Facebook feed

Facebook has changed the news feed to emphasize personal connections. You might see less news.

As Olympics wrap up, still no coverage in North Korea

PYEONGCHANG, Korea, Republic Of — While hundreds of millions of the world’s… Continue reading

Supplier to NHL’s Calgary Flames breathes again as B.C. wine ban suspended

VICTORIA — The operators of a small British Columbia winery that landed… Continue reading

Canada’s men’s hockey team beats Czechs to win Olympic bronze

GANGNEUNG, Korea, Republic Of — Canada’s men’s hockey team has won the… Continue reading

Duncan apologizes for behaviour after drunken joyride in Pyeongchang

PYEONGCHANG, Korea, Republic Of — Canadian ski cross racer Dave Duncan is… Continue reading

In Pyeongchang, maintaining Olympic venues relies on a poor, aging workforce

GANGNEUNG, South Korea - Hockey players from Finland were circling with the… Continue reading

Trudeau’s fashion missteps highlight what not to wear on vacation

TORONTO — The traditional garb that Prime Minister Justin Trudeau and his… Continue reading

Stores make push in scan and go tech, hope shoppers adopt it

NEW YORK — Shoppers at self-checkout lanes scanning all their groceries after… Continue reading

Most Read


Five-day delivery plus unlimited digital access for $185 for 260 issues (must live in delivery area to qualify) Unlimited Digital Access 99 cents for the first four weeks and then only $15 per month Five-day delivery plus unlimited digital access for $15 a month