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Finding a Way Out When Do-It-Yourself Debt Consolidation Fails

Managing money effectively is tough enough with a steady income, but when your income is variable because you work on tips or commission, it makes it even more challenging. This is especially true during an economic downturn, where you can almost expect to see your cash flow dry up. As everyone else tightening their belts and cutting discretionary spending only makes your financial situation worse.

Carol worried how she would pay her bills during the economic downturn

The problem is then often compounding by using stop-gap measures, such as debt consolidation. You consolidate your debt to lower your payments, but that usually doesn’t fix underlying budget problems because you’re spending more than you earn. As a result, do-it-yourself debt consolidation measures are more likely to fail and can even make debt problems worse.

This is the situation that Carol faced during the Great Recession. As a waitress, she makes her living on tips. But when customers aren’t coming in and tipping, it’s easy to fall behind.

Money was tight even before to the downturn…

Carol went into the Great Recession in a similar situation to millions of Americans – she was just getting by before the economy tanked and sent her finances into a tailspin.

“In 2002 I got divorced and it was a struggle to keep up with my bills on my own,” Carol recalls. “Getting the second job helped, but I was still using credit cards to cover everyday expenses.”

“I was using credit cards to cover everyday expenses. Things were slowly getting out of control and I knew I’d eventually have to find a solution.”

Carol admits that because she was able to make her minimum payments, she procrastinated on finding that solution. But when the housing market crash in 2008 triggered the Great Recession.

“When the economy started going down the drain and it really impacted my waitressing job more than I ever thought possible.”

Carol went from just getting by to being completely overwhelmed. Her income as a waitress was cut to a third of what she was earning before the downturn. She went from making $30,000 at her night job to making just over $10,000. Families were staying home to eat and when diners did come in they still weren’t throwing down large stacks of cash.

Things only got worse when the owners of the hotel where she worked sold it. After it changed hands, the bottom fell out completely on Carol.

“Our regular clientele didn’t follow us once the new management took over,” Carol says. “My tips dropped dramatically and it was even worse than it had been. I worked as a waitress for over 25 years and got used to that money. Once it was gone it really hurt me financially. I started to rely heavily on my credit cards.”

Carol tried balance transfers, but didn’t stop spending…

Realizing her situation couldn’t continue as it was, Carol moved the balances from the several credit cards she had open to a new credit card with a 0% introductory interest rate. This can be a viable option for eliminating debt, but only if you stop charging and focus wholly on paying off your debt. Carol wasn’t able to do that and unfortunately, that meant that her situation only got worse.

“I should have left the other credit cards alone once I transferred the balances, but I still needed them to cover basic necessities after my waitressing job fell apart.”

By the time the introductory period on the balance transfer credit card ended, Carol still hadn’t come even close to paying off the balance. Now she had new balances on her other cards and a higher interest rate on her consolidated debt. Instead of getting out of debt, she’d gone farther into debt.

Carol’s next try at debt consolidation was even riskier…

“I contacted a bank representative to see if I could get the interest rates reduced from the 15% that I was paying,” Carol recounts. “They wouldn’t do that, but they offered to combine my credit card debt with my home loan. It seemed like a good deal.”

However, she quickly learned otherwise.

Essentially, the bank rep moved Carol into a home equity loan. This is where you take out a second mortgage against your home to get money. It’s like a secured version of a debt consolidation loan. The big problem is that it can significantly change your mortgage payments and if you default you’re now at risk of losing your home. Carol quickly recognized that the “cure” was even worse than the condition she’d faced previously.

“My mortgage payments went up to $2,000 just as my tips from waitressing went down again after the hotel changed hands,” she explains. “I could barely make the payments, but only if I started charging my day-to-day needs on credit cards again.”

To make matters worse, Carol realized adjusting her mortgage had caused serious issues with her housing costs. The interest on her mortgage had become a significant drain.

“Out of that $2,000, I was paying over $1,000 a month in interest on the mortgage,” Carol says, adding, “I felt hopeless. I was losing sleep and getting nowhere.”

Carol finally found her light at the end of the tunnel…

Seeing nowhere else to turn, Carol struggled along like this for five years until she’d amassed almost $40,000 in credit card debt.  She was driving home one day, fighting back tears of frustration when she heard a commercial for Consolidated Credit. Feeling like she had nothing to lose, Carol made the call as soon as she got home.

Her certified credit counselor Adam immediately helped her by laying out a plan that would actually provide the relief Carol so desperately needed.

“Consolidated Credit got my interest rates cut from 15% down to 2%, which was a huge help. Making the payments and not putting anything on credit was tough at first, but I persevered.”

Even better, Adam connected her with Consolidated Credit’s HUD-certified housing counseling team. They helped her use a government program that allowed homeowners to modify bad mortgage terms following the housing crash.

“I also qualified for a Home Affordable Modification Program loan, and that dramatically lowered my mortgage. Then we worked out a new budget. Making the payments and not putting anything on credit was tough at first, but I persevered.”

Carol recently sent Adam a personal email to thank him for his help now that she’s almost out of debt. Thanks to the plan she worked out with Adam and Carol’s own hard work and dedication, she should be debt-free by July. On behalf of Adam and everyone at Consolidated Credit, we’d like to congratulate Carol on doing whatever it took to achieve stability. It’s never an easy journey, but we’re happy we could help you find a path to move forward!

If you’re facing challenges with debt and can’t successfully consolidate on your own, we can help.

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