Debt consolidation is not only a bad idea: It’s a scam

by Carlos Martinez, Bankruptcy Attorney, Scura, Wigfield, Heyer, Stevens & Cammarota, LLP

A few days ago, I met a couple from New Jersey looking for financial assistance. Like most of my clients, their story was the same: married, two teenagers in high school, a nice home to accommodate the family, living paycheck to paycheck, and completely drowning in debt. Aside from their mortgage, the bulk of their other debt consisted of credit cards and personal loans – the total amount of their debt was about $85,000.

As I probed for answers regarding the gist of their financial difficulties, they began telling me about this “debt consolidation program” they were in.

At that exact moment, I knew the reason why they were in my office.

Rewind back to September of 2018: this couple was watching TV one night and they catch one of these debt consolidation commercials that are currently flooding the market. Fast-forward six months, now in my office, they had recently made their 6th debt consolidation payment. Not surprisingly, they were also wondering why two credit card companies were suing them.

Two lawsuits and $7,200 later, here is this couple looking to me for answers as to where they went wrong.

“We were just trying to get back on our feet, fix our credit,” said the wife as she softly dabbed the tears from the corners of her eyes. “We were just trying to do the right thing,” said the husband.

I am a big believer that everything happens for a reason, and lucky for them, I became a bankruptcy attorney to help people who have found themselves in this exact situation. Not surprisingly, they saw debt consolidation as something to try before resorting to bankruptcy, but as soon as I answered some frequently asked questions about bankruptcy, they found out that bankruptcy was their best option.

After I explained to them how debt consolidation works, and how I would be able to help them, the immediate sense of relief was almost palpable. Needless to say, the couple left my office that day feeling relieved, full of hope, and, as we like to say around here: “in a better position than when they first came in.”

I am still shocked by the amount of people that consider debt consolidation over the other more viable options such as bankruptcy, but I understand it. My position as an attorney allows me to be exposed to the debt consolidation horror stories that most never hear about. I am here to INFORM the MISINFORMED.

With that being said, how exactly does debt consolidation work?

How They Tell You “It Works”

We’ve all seen the commercials: “If you find yourself in credit card debt – you’re not alone. Millions of Americans suffer from the same predicament. Support agents are waiting this very moment to walk you through the steps necessary to put you on the path to financial freedom. If you are tired of having a bad credit score and tired of carrying high interest balances – we can help you raise your credit score by consolidating all of your debt into one manageable payment. Call now! And be on your way to financial freedom.”

Cut and print scam – sorry, I mean scene.

Once you decide to give this debt consolidation company a call, they take an audit of your entire debt in order to calculate your monthly payment amount. For example, let’s say you have about $25,000 in credit card debt. They take this information from you, including the names and account numbers of the creditors you owe money to. After this initial step has been completed, you’re offered a 3-year debt consolidation plan with a single monthly payment of $700.

They will say: “We will start negotiating your debt and take care of the rest…all you have to do is make the monthly payment and be on your way to lower interest rates, a better credit score, and financial freedom.”

The simplicity of it all sounds too good to be true, but when you’re financially strapped, how could you ever blame anyone for falling for this?

What the Debt Consolidation Companies Don’t Tell You

Months go by and you’ve made your payments on time every month. You’re excited because you have a decent credit score (that you expect will increase due to the debt consolidation program), and your on your way to being debt free. Oddly enough, you begin to receive strange phone calls from your credit card companies telling you that you are months behind on payments, and if you don’t make a payment soon, your account will be in default and placed in collections.

You call the debt consolidation company seeking answers and this is their cookie cutter response: “Its ok, that’s perfectly normal…just keep making the monthly payment to us and we’ll address the issue directly with the creditors.”

Here’s the truth that these debt consolidation companies conveniently leave out:

You will default on your credit cards and your credit score will tank.

The payments that you have been making on time every month are put into a metaphorical “pot” which is held until you have defaulted on your accounts. At this point, these debt consolidation companies will begin negotiating with your creditors to bring down the balance owed on the account. But why would they do this?

They need your accounts to be in default because, if you’re up to date with your payments, there is no incentive to consider you for an interest reduction or balance negotiation. On the other hand, if you are behind on your payments, creditors are incentivized to work with you so you could keep making payments.

Defaulting on your debt means a lower credit score – and if that’s the case – your credit score will be worse off than when you first began the debt consolidation plan.

Lawsuits can and will be filed against you.

This should come as no surprise. If you default on your debt, your account will be placed in collections and if the debt remains unpaid, you will be sued for any balance you owe. Debt negotiation is a long process, and credit card companies will continue with any lawsuit filed against you, whether your debt is being negotiated or not.

The lawsuit will move forward and could end up in a judgment entered against you. The credit card company can then take this judgment and have your wages and bank accounts garnished, or have a lien placed on your home. For example, if you own a home in New Jersey, any judgment filed against you becomes an automatic lien on your home.

Debt Balance Can Probably Be Negotiated but Your Money is Gone

This is simple math. Sticking with the earlier example, you have about $25,000 owed to two credit card companies, and you’re in a 3-year debt consolidation plan with a single monthly payment of $700 ($25,000/36 months). Company A is owed $10,000 and Company B is owed $15,000. You’re a year into the debt consolidation plan and both accounts are either in default or closed. The debt consolidation company is successful in negotiating Company A’s debt from $10,000 down to $5,000 and Company B’s debt from $15,000 down to $10,000. Because the debt consolidation company was successful in reducing your debt down by $10,000, your new “debt balance” is $15,000.

Even though the debt was substantially reduced, you will continue to make the $700 payment because the debt consolidation company won’t tell you that the debt was negotiated down – all you know is that you are contractually obligated to pay $700 for 3 years. To put it bluntly, the debt consolidation company was successful in reducing your debt by $10,000 and have no problems keeping that portion for themselves.

There Are Major Tax Implications

This is even simpler: Any debt that a debt consolidation company can successfully settle or negotiate down, is considered income to you, and subject to be taxed by the IRS. Thus, not only will they get to keep any money that they can successfully help you get rid of (as described above), but you will be the one to pay taxes on it.

Nothing is Guaranteed

The debt consolidation commercials are specifically designed to evoke an emotional response and make you infer that the debt consolidation program can render guaranteed results. This is far from the truth. If you decide to pick up the phone and call one of these debt consolidation companies, they will not be shy to tell you that not all of the debts can be consolidated (e.g. personal loans, student loans, and taxes, etc.).

What they won’t tell you is that some creditors will just not negotiate and there is a probability that you can still owe the debt even after you have made all of the payments under the debt consolidation plan.

Don’t believe me? Pick up the phone and give them call – they won’t guarantee results even though they guaranteed financial freedom, and I just don’t see how you can have one without the other.


Let’s recap the entire thing: you’re sitting in front of the TV and you happen to catch one of these debt consolidation commercials – high credit scores and financial freedom right at your fingertips.

But wait.

1) You have to default on your credit cards which will ruin your credit

2) You can and will be subject to lawsuits while the debt consolidation company works on negotiating your debt

3) Even if they can successfully reduce your debt, they will keep the difference

4) Not only will they keep the difference, but you will have to pay taxes on the debt that was successfully negotiated, and finally

5) Not only are you subject to lawsuits but there is no guarantee that they will be successful in negotiating your debt down.  

Trust me – I understand what it is like to be financially up against the wall. I was there when I was younger and I became a bankruptcy attorney so others didn’t have to experience the same financial pitfalls that I fell into.

I know that taking on the debt consolidation market is like taking on Goliath. However, if I can get one person or a couple, much like the one described in this story, to take a step back and really see debt consolidation programs for the scam that they are – then I have done my part to spread awareness and prevent others from being scammed.

Goliath did lose in the end after all.  

Carlos Martinez is a Bankruptcy Attorney with Scura, Wigfield, Heyer, Stevens & Cammarota, LLPFor any bankruptcy concerns you can contact the law firm at (888) 412-5091. Free consultation is provided in their offices in Wayne, Newark, Hackensack and Hoboken, New Jersey. 

This is a sponsored section. The advisors have paid a fee to post their commentary here. Their sponsorship doesn’t influence any editorial decisions we make at, or give them more or less exposure in our stories. Their posting does not constitute an endorsement by