How I Botched My Debt Consolidation, Destroyed My Credit and Was Sued by a Bank

We all make money mistakes. Even “nationally recognized financial experts.” Gather round, children, and let me tell you the story of my botched debt consolidation.

It's no secret that, when my ex and I divorced more than four years ago, we had some debt. I had just nailed down a big contract, so I used it to wipe out some of the credit cards in his name. I also made a few other adjustments.

With my income, I knew, I'd be able to handle the debt, and I wanted him to have a solid financial start. Even though he asked for the divorce, and I wasn't super happy about it, I didn't want to make things hard.

To the contrary. I wanted things simple and easy and was willing to do just about anything to get a fresh start.

So I shifted things around, took out a personal loan to move across the country, and left him debt-free. (Except for his student loans. I did pay off his private student loan, but he still has his federal loans. But I digress.)

Emotions and Poor Financial Decisions

Now, in most cases, I try to avoid financial mistakes. We all make them, though. Sometimes we even make them when we know we shouldn't.

With regard to the debt left over from the marriage, I let my emotions rule me. Did I pay off my own new spending on credit cards each month? Of course.

But I didn't make an effort to pay off what I'd shifted to my own credit card at the end of the marriage particularly fast. Basically, I didn't want to draw down my travel fund, my emergency fund, or any other thing to pay off this debt.

In my mind, I didn't want my resources going to this joint debt. Stupid, perhaps, but that was my emotional blindness. So, even though I was paying interest on it each month, I told myself the interest rate was low, and it wouldn't matter as much.

And besides, if I paid off that debt, my bucket list items of taking a trip across Canada and going on a Viking River Cruise would have to be put off — possibly for years.

My ex wasn't interested in these types of adventures with me during our marriage. So, the two subsequent summers following the divorce, I did these things. Because I wanted to.

I kept the debt, sequestered in a couple of accounts, paying it off bit by bit, but determined not to inconvenience myself or put off the things I'd put off for years already.

This short-sightedness was a huge mistake that led to my debt consolidation debacle.

The Debt Consolidation Debacle

So this is where it gets a little spicy. We all know that, in some cases, debt consolidation can be attractive. Get a lower-rate loan, transfer to a 0% APR credit card, whatever. It can save you money on interest, help you better manage the situation, and has all sorts of benefits.

I received a pre-screened debt consolidation offer. My credit was excellent, so I was like, why not? Call the number, consolidate this debt at a low interest rate, have it paid off in 24 months and boom. Out of sight, out of mind, and no inconvenience to me.

So I made arrangements and received the paperwork. I was busy. There were obligations I was dealing with. Excuses abound. But the bottom line is this — I didn't read the paperwork carefully.

Louder, for those in the back:

I DIDN'T READ THE PAPERWORK CAREFULLY.

Electronically signed, sent off. Agreed to have payments taken from my bank account. All good, no problems. Automatically getting rid of the issue.

Well, my friends, what I thought was a debt consolidation ended up being a debt settlement. And there's a world of difference.

Goodbye, Sweet Credit Score

As you probably know, a debt settlement involves you stopping your payments to creditors in favor of sending money to a third party. This third party is supposed to negotiate on your behalf, settling for you to pay less than you owe.

However, as you proceed, your credit score tanks. You're missing payments left and right. I thought I was making payments on a low-rate debt consolidation loan, but in reality, I was sending money to a debt settlement company.

I didn't notice my credit score was tanking because I don't have monitoring. And I wasn't keeping up with my annual review of my credit report like I should have. The fact that I wasn't paying attention was the biggest mistake of all.

What grabbed my attention was a lawsuit. I was being sued for debt collection. Wait, what? But it should have been paid off! I got a debt consolidation loan! Sadly, not. Being in a debt settlement program won't protect you from lawsuits. Some creditors will still come after you in court.

I looked into the situation and the paperwork and realized my blunder. Now, of course, I'm trying to rectify the situation. I'm on a payment plan with the bank that sued me and working on recovering my credit score. Sadly, that's a bit difficult. Because, and here's a fun fact, if you have good credit and then suddenly start missing payments, it takes a bigger toll on your credit score than if you have fair credit and start missing payments.

At any rate, this massive blunder put red flags on my credit report, tanked my credit score, and made it so that I ended up without being able to get a small loan when getting my son's latest car.

Luckily, I Don't Have to Care

Of course, my son got his car anyway. I've got a fair amount of privilege, and this mistake isn't stopping me from accomplishing my other financial goals. Not everyone is so fortunate.

A mistake like this could have bigger consequences on someone else. Someone who might rely on credit to help them get out of poverty would be devastated by a mistake like this.

Those who live on the edge wouldn't be able to brush off an issue like this. I'm fortunate that I've had the resources available to me to help me build up a degree of security. I don't have to care if my credit score is wrecked for the next two years.

If you're trying to improve your situation, debt consolidation can be a good tool. But you have to be careful.

• Make sure you understand what you're getting: Sometimes, you get an offer for a debt consolidation. However, they might tell you there's some reason you don't qualify. Then they transfer you to a different program. That program might be a debt settlement program.
• Debt consolidation vs. debt settlement: Debt consolidation uses a larger loan to pay off your debt. Your smaller loans are paid off, and you just make one debt payment. Debt settlement is about getting your creditors to let you pay less for your debt. It involves looking at the risk of a complete loss. So, you miss payments, and your credit score takes a hit.
• Read the paperwork: I rushed through the whole situation, without paying proper attention and double-checking the paperwork. Go through everything, and don't sign if things look off.

Not everyone knows better. But I did. There is no real excuse. This whole thing is ridiculous, and I knew better.

Hopefully, sharing this embarrassing story will help someone else. Whether it helps you feel better about your own mistakes or whether it keeps you from making a new mistake, I hope this benefits you.

At the very least, now you know: Personal finance experts — they're just like regular people!