Consolidating loans can be a good first step, but discipline is the knockout blow

ELIZABETH LAZAROWITZ
DAILY NEWS BUSINESS WRITER

The pitches make it seem so simple: One monthly bill! Cut your payments in half! Slash your interest rates!

When you're drowning in red ink, debt consolidation can seem like an easy answer. Combining debts can be part of a path to solvency, but there are risks involved.

"There's nothing that's easy, there's nothing that's painless, there's nothing that's harmless," said Mike Sullivan, director of education at credit counseling group Take Charge America.

That means it's important to investigate any claims a company makes, get everything in writing, and read the fine print carefully before you sign anything, experts said.

Combining credit card debt onto one low interest rate card is one way to help cut monthly payments, but there are often extra costs to consider. Companies sometimes charge a fee to transfer your balance, and some of the best offers have teaser rates that surge after a set amount of time. Hopping from card to card repeatedly can put a dent in your credit score, Sullivan said.

"You're just moving debt around. It will eventually catch up with you."

For homeowners, home equity loans are another option for combining debt, one that became very popular during the early 2000s as interest rates dropped. Lower rates can make these a good option - if you can get them. Consumers who are already having trouble paying their bills may not be eligible for the lowest rates. There can also be hidden fees you have to factor into your overall costs, such as closing costs, lawyers' fees and penalties for paying off a loan early.

The biggest concern with such a loan is that you're using your home as collateral. That can be dangerous for a person who continues to lean on credit cards.

"A lot of people who [move card debt to a home equity loan] start charging right back on the credit cards, and then they have two debts," said Chris Dlugozima, a counselor at credit counseling agency GreenPath. "If you don't pay your credit cards, they can't take your home. If you have a home equity loan, they could."

If you're having trouble even making minimum payments and you're getting slammed by late fees, a debt management program, offered by credit counseling agencies, is another option.

These agencies can negotiate on your behalf to lower your rates and get rid of late fees.

They collect one payment from you monthly and disburse the money to your creditors. They also typically charge for this service, including a startup fee and monthly costs that can add up to hundreds of dollars. For that reason, you should first try negotiating with your creditors on your own.

You also need make sure that you're working with a reputable agency. Fees so high that you won't be paying down debt for several months is one big red flag, said Ron Berry, senior vice president of the Council of Better Business Bureaus. Some unscrupulous agencies will direct you to a for-profit financial partner, so be sure to ask who actually will be administering the debt payment plan. If you're going to do it, "you have to read the agreement very carefully," Berry said.

The council's Web site, bbb.org, lists many licensed credit counseling agencies, along with their complaint and resolution records.

Debt management shouldn't be confused with debt negotiation, in which a company takes your payments and holds them in escrow until creditors agree to accept a portion of the debt.

While this can be a viable alternative to bankruptcy, it will still hurt.

You'll have to pay fees to the debt settlement company, and any amount over $600 that your creditors forgive will be taxed as income.

Your creditors may decide to take legal action against you while you're negotiating, and your credit score will likely be damaged severely for years, even if you reach a settlement.

Debt consolidation can help you get out of a sticky situation, but it's not necessarily a long-term fix, Sullivan said. "The trick," he said, "is to stop spending" beyond your means.

Dinners, vacations, a boat = huge bills

After a decade of getting himself buried under a mountain of debt, John Sherman, of West Babylon, L.I., decided there was only one way to dig himself out: debt consolidation.

In the late 1990s, Sherman was newly divorced and bringing in $70,000 a year as a computer programmer. But the 61-year-old was also burning through his paycheck every month and frequently slapping down credit cards for dinners and vacations. His card balance rose to $35,000. "I saw the debt was going up," Sherman said. "I'd make the minimum payment, figuring: 'I'll double up on the payments and take care of this – later.' "

Even as his debt mounted, credit was easy to find. He bought a $50,000 boat, financing all but $10,000 of it.

He got laid off in 2001 and then worked as a consultant, but by 2003, work was scarce and paying the bills got harder.

Sherman tried running a business selling other people's stuff on eBay for commissions, but only ended up racking up another $20,000 in debt on as many as 12 credit card accounts, and borrowing from his 401(k).

"I was not even making the minimum payments," he said.

To help fix his troubles, he set up a debt management plan in 2004 with Consolidated Credit Counseling Services, which negotiated his credit card interest rates down to about half of what they were originally. While he pays about $50 a month in fees, the plan has let him chip away about $10,000 of his massive debt. He also recently sold the boat.

Sherman has since landed another full-time computer programming job, but he's steering clear of credit cards and hopes to be done with the payments in about five years. His progress "is a bit of a relief," he said, "but I wish I'd never gotten into debt in the first place."

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