In Over Your Head in Debt? How to Know When it’s Time to Consolidate. | Molly’s Money

If this is your first time here, Molly’s Money is a series I write on this blog that includes all things personal finance. Got a question about money that you want answered? Leave it in the comments below or email me!

One of the most common questions I get asked from readers is how I went about consolidating my debt when I was working to become debt free. I’m not going to rehash my whole story on how I overcame $36,000 in debt and how I became debt free, you can read about all of that here. This post is more about how I knew it was time to make a change and why I decided to go with consolidating my debt through NovaDebt. In essence, this is pretty much a NovaDebt review. This post is not sponsored. NovaDebt has no idea I’m even writing this. I just get SO many questions about NovaDebt that I felt it was time to devote a post to them.

How I Knew It Was Time to Consolidate My Debt

In June of 2008, I sat in my room in Richmond staring at my bills and I had a literal panic attack. I couldn’t breathe. I was shaking, crying, and so overwhelmed. I’d been barely scraping by paying the minimum balance on a few cards, but I’d been late on others. I had overdrafted my checking account for the fourth time in four months and I was completely at a loss. And the truth is, I had no idea HOW bad my debt actually was. I just knew I was in over my head.

So, I got on the phone with my bank pleading for them to remove the overdraft charges for the umpteenth time and the woman on the phone was so kind and so understanding and could clearly tell that I was in distress. She interrupted me at one point and said, “Would you like to get some help with your debt?” I sighed and told her yes and she connected me to NovaDebt.

NovaDebt is a non-profit, consumer credit counseling organization. I got on the phone with a representative and basically walked her through my situation. She asked me a few questions and, finally, we were able to determine how much debt I had. $36,000 and some change. I knew it was bad, but I didn’t know it was THAT bad. At the time, I only made about $30,000 a year as a high school teacher and so seeing that my debt was larger than my annual salary, I had another panic attack.

The woman on the phone was calm, able to calm ME down, and she told me it was going to be okay and I was going to get through this.

Once we assessed how much the MINIMUM monthly payments on everything was, how much my expenses were, and how much income I had, we were able to see that there was, quite literally, no way I could make it work without going further and further into debt and further damaging my credit.

That’s when she told me about consolidating my debt with NovaDebt. That’s when I knew I needed to consolidate.

A Few Questions to Ask Yourself to Know if It’s Time To Consolidate Your Debt

1. How much is your monthly income? Write down EXACTLY how much you make each month… every dollar and penny that comes in.
2. How much are your monthly expenses that you HAVE to pay to live? I’m talking rent or mortgage, phone, utilities, car payment, insurance, etc. I’m NOT referring to any debt yet.
3. How much is the MONTHLY minimum on all of your debt? Count up your credit cards, student loans, etc. Anything that you owe that you are paying off each month.
4. Look at the interest rates for those things and see how much further debt you are accruing by not having those things paid off.

If the answer to the last three questions is a GREATER amount than the first question (i.e. you have more money going out each month, mostly due to your debt, than coming in…) then that means it is time to consolidate your debt.

Debt Consolidation vs. Debt Settlement vs. Bankruptcy

Debt Consolidation is, quite literally, taking all of your debt and consolidating it into one lump sum or payment. You negotiate with your creditors (well, NovaDebt negotiates), gets your interest rates lowered, and then you pay NovaDebt one payment and they pay your creditors. You pay every cent you owe.

Debt Settlement is settling your debt with your creditors. If you owe $20,000 in debt, you might “settle” your debt with your creditors (or a debt settlement agency), and you only end up paying say, $10,000 of that debt. Well, while that sounds all great and dandy, it’s actually terrible. Your credit score is totally trashed and it’s hard to recover from debt settlement, PLUS, they can actually come back at you years down the road and ask for the rest of the debt you owe. Debt settlement is NOT the way to go.

Bankruptcy is where you say, “That’s it, I can’t do it anymore” and your debt essentially is wiped clean. However, your credit is  RUINED, you can’t get a loan, a credit card, you pretty much can’t do anything for AT LEAST seven years after filing bankruptcy. Bankruptcy is a LAST RESORT and should never, ever, ever be considered unless you’re in dire straights.

In a nutshell, debt consolidation is the WAY to go. TRUST ME from experience.

How NovaDebt Works

So, once you decide that you want to consolidate your debt, you give NovaDebt all the information for all of your creditors, etc. and they contact each one and negotiate your debt for you. They negotiate each interest rate on each card, etc. and then give you a payment plan. Some cards they were able to get down to a 1% or 2% interest rate, a couple cards they were able to get to 0% interest, and so on and so forth.

Once they negotiate with your creditors, you pay NovaDebt a monthly payment plus a monthly maintenance fee. My maintenance fee was no more than $25 a month at any one point. Towards the end it was less. To me, the maintenance fee was totally worth it for the help they gave me. It was negligible in the long run.

Each month, I would pay NovaDebt, and then they would distribute payments to my creditors and pay my bills for me.

During this time, each card was “closed,” however, they did allow me to keep one card open for emergencies. I still received my statements every month and I would check them to make sure that they were being paid and that my balance was going down. As I started making more money, I was able to over-pay my monthly payment each month, throwing more cash at my debt, and I was able to pay down the balance faster.

I sent my last check to NovaDebt in March of 2012. I paid off my debt, $36,000+ worth, in a little less than four years. If I had NOT gone with NovaDebt, it would have taken me about 46 years to pay off my debt, just paying the minimum payments. My original payoff timeline with NovaDebt was about five and a half years. So, overpaying cut off about a year.

Other Benefits to Using NovaDebt

*Now, I know there are other organizations that do debt consolidation out there… however, since I did not use them, I can’t speak to how they work or their reputation. I’m just giving you my thoughts based upon my experience with NovaDebt.

Once I got on the plan, they gave me a TON of resources for just learning about getting my finances in order. They gave me workbooks, books, etc. to help me learn how to budget and plan for my financial future.

They also have a TON of resources on their website for student loan counseling, bankruptcy counseling, housing counseling, debt management, and more. They are a counseling organization, first and foremost, and so their goal is to help you where you are.

FAQs about NovaDebt (and debt consolidation)

1. Will debt consolidation hurt or help my credit score? For me, debt consolidation HELPED my credit score. It won’t be completely restored when you are done, but you will be WAY better off than you were. My credit score was VERY POOR when I started, and now, it’s in the excellent category. Remember, you’re paying every penny you owe… so that only helps! Just make sure you pay NovaDebt on time each month.
2. Isn’t NovaDebt a scam? What’s with the $25 maintenance fee? They are not a scam. The $25 maintenance fee pays for the resources you are provided, plus the overall management of your account. Remember, NovaDebt is a NON-PROFIT organization, so they don’t benefit from scamming you. It’s the for-profit organizations claiming to help you with your debt that you need to watch out for.
3. Can’t I just negotiate with my creditors on my own? Sure. You absolutely can. However, you may not have any luck. Or you could have all the luck in the world. It’s a total crap shoot. NovaDebt does this for a living, so they know exactly how to negotiate. Plus, their resources really help you stay on track. If you can negotiate with your creditors and you KNOW that you won’t forget one over another or that you’ll pay on time each month… then go for it. For me, NovaDebt was a life saver.

I hope this was helpful!

Got questions? I know this is a tough subject for people… so feel free to email me if you don’t want to post your question publicly!