A Co-Worker of my Wife just got turned down by a bank for a Mortgage.  She told my wife that it was because they underwent "Debt Consolidation"--from the way my wife described it, it was one of the free services that re-negotiate with your creditors and you pay the service who then disburses the money to the creditors.  

The Co-worker said they paid off the service over a year ago (i.e. No more debts), but the Mortgage guy said that the debt consolidation counts more against you in a credit score than a bankruptcy does.

Does this sound true or does the Co-Worker have other problems she did not tell my wife about?

AFARR

It most likely has a time line.  Some people see all their credit card bills, electric, water, phone, cable, cell, lease payments, and mortgage all together and freak.

I know a few "friends" that I sort of talk too.  I see them now and then.

One said that he sat down and looked at what he was making, when computers were the thing a few years back, and looked at what he was spending.  In 3 months he cleared more than I made before taxes.  He spent it all, ran cards way up and everything.

He went for consolodation, but did not try and make some important points in my mind.

He still had cable, ate out a lot, expensive cars, expensive well furnished house, the sorts of things I consider luxuries.

He did not try and pay things off by budgeting, he hid behind the consolodation.

Some of these other people I know have had some problems, but they have cut off luxuries, sold what they could and sacrificed to make payments for what they owe.

The first guy mentioned, really did not sacrifice diddly.

I am not an expert and have no real experience with this other than talking to people about it.

The one guy is so proud of what he accomplished.  Over extended himself and passed it to others.

So the entire story may help, I do not know what shows up on credit reports.  But I do know a lot of people refinanced and still kept big screen tvs and surround sound systems while I just have a 19 inch tv paid for.

When you do bankruptcy I think everything gets logged, this consolidation is a grey area for people who like to fudge numbers.

That co-worker can forget about qualifying for a mortgage loan for many years. Mortgage lenders do not want to see that on credit reports and yes it is almost as bad as a bankruptcy. Unfortunately, too many people go that route through ignorance, thinking it will help repair their credit when in actuallity it is a a big nasty mark that no lender wants to see. The co-worker will need to look at no-qualifying type mortgages (of course with bigger down payment) to get in a home. I work at a financial institution and see this shit all the time.

As a finance manager formerly in the car business and currently in the motorcycle business, YES a debt consolidation is actually worse then a bankruptcy!! When a debt consolidation company "negotiates" = "fucks over" your creditors, all your creditors report negatively on the credit bureau. This is because the creditor will never get all the money rightly owed to it.  If you are going to consider consumer credit counselling just go ahead and file a chapter 7 BK and be done with it. It affects your credit the same and you arent on the hook for all the stuff you shouldnt have spent your money on in the first place!

[beer]

Hmmmm.... because of low interest rates by now, I've read lots of articles suggesting that borrowers of student loans consolidate now and lock in on the low interest.  In fact, Sallie Mae (whom I borrowed from) sent out advertisements suggesting you do this.  Is this something completely different?  Or is Sallie Mae going to give me bad marks for something they suggested I do?

Rocko

I should have been clearer. Getting a loan for the porpouse of paying off a bunch of debt is a fine idea. Going to a credit couseling and having them negotiate your debt down thereby screwing your creditors is bad. But, yes now is a good time to get a nice low intrest loan to pay off higher intrest loans you have, just dont go ring up the high intrest loans again after you pay them off!!

[beer]

Have your co-worker talk to an FHA approved broker. HUD/FHA is very interested in seeing people get into home ownership. To this end they usually have significantly reduced credit requirements for loan approval. There is a mandatory 'Mortgage Insurance Premium' that is equal to 1.5% of the loan amount and is usually financed into the loan. In addition to this 'up front MIP', there is a monthly Mortgage Insurance payment of .5% of your loan amount divided by 12 months. These two mortgage insurance payments go towards an insurance policy that will pay-off the bank for the amount of your outstanding mortgage balance if the borrower defaults. The borrower still is foreclosed upon and has their credit thrashed, but the bank's losses are covered. Because of this MI, FHA banks are willing to stretch the qualifying credit criteria. BTW, two years ago HUD lowered the % requirement for the upfront MIP from 2.25% to 1.5% as there was a surplus of over 2Billion in the insurance accounts. This unused insurance money means that there were far fewer defaults than HUD thought and the system works even better than expected.

That is something completely different.

I would be hesitent to payoff old bills by refinancing the house. Even though you do save money if it ever got bad enough you could always go the BK route and keep the house but by putting your old bills into your house mortgage you are stuck with them.  I would rather have the second available for an emergency if one where to ever arise.  mY friend file for BK and the lawyer told him the same as other guys have mentioned, debt consolidation is going to jack up your credit as much as filing, might as well save some money.

Currently going thru debt consolidation right now. As I understand it, creditor will report a slow pay while your are undergoing debt consolidation. However once debt is paid off, it will show fully paid on your credit report. My bro has gone thru this as well and was able to get a home loan with a better rate than what he would have had without going thru debt consolidation.
As far as getting screwed, I don't think that necessarilly the case here. Unless you are trying to get credit while in the debt consolidation phase. Cause you won't be able to. The company I am using has managed to have most of my interest rate drop within 5%. 2 of my Capital One card are now at 0% interest. The rate I am going, I will have everything paid off in another 1 1/2yrs.

Unfortunately, bankruptcy is not an option for me if I want to stay in the financial services field. Bankruptcy will not only go on my credit but will also go on my licenses. Makes it VERY hard to get another job.

Coincidentally, I was just looking for a way to consolitade my debt this morning. But if it will jack up my credit and hurt my chances of getting a home loan later in life, I'll reconsider. Does anyone have any experience doing this while managing to keep their credit in tact? I have checked several sites claiming to reduce principle, payment and interest rates. Should I be weary of any?