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Watch Out for These Debt Consolidation Programs

Before you contact a company offering a debt consolidation program, you should be aware of how the program works. Will they get you out of debt, or seriously hurt you financially? It can happen if you don’t know what you’re getting into. Check out the following methods used by these companies and then be sure you consider the effect it will have on your future financial situation before you sign up with any debt consolidation company.

Note that debt consolidation companies are also known as debt negotiation, debt arbitration, debt reduction or debt settlement companies.

Pitfalls

If you are in a desperate financial situation, the first thing you need to do is calm down before you contact any company for help. Being in desperate need of help may cause you to hear only what you want to hear and not what you need to hear and understand. Here’s a dose of the truth.

Debt Consolidation Loan

Think about that for a minute. Who will give you a loan if you’re already in trouble and your credit score stinks? You are already a credit risk, and it will be very hard to get a loan with a decent interest rate from a reputable bank or lending institution. But the debt consolidation company may try to entice you with promises of easy-to-get loans at low interest rates. However, you may end of paying as much as 22%.

Transferring Your Balance - Only Works for a Few Months

Balance transfers to a lower interest loan are sometimes offered, but this deal only lasts a few months. Then the interest goes up to a much higher rate.

So Called Non Profit Debt Consolidation Companies Really Aren't

There is a misconception that non-profit companies do not charge any fees for their services. But it makes no sense for them to be in business if they are not going to make a profit. If the truth be known, many of these companies, while operating as nonprofit educational entities, are in reality little more than boiler-room telemarketers using high-pressure sales tactics to get you to sign up for debt management plans that generate millions of dollars in fees for the counseling agencies. Many of the executives of these companies have annual salaries in the hundreds of thousands of dollars, but they still keep their non-profit status since they function in the public’s interest.

Keep in mind that 100% of the revenue received by a non-profit credit counseling company comes from their clients, so you can be assured that you will be paying a fairly high amount in servicing fees. Some non-profit companies also take in additional revenue when they refer you to other companies who market other products.

As an example, the Federal Trade Commission shut down a debt consolidation company for deceiving consumers into paying at least $170 million in hidden fees. The FTC charged that the company misrepresented itself as a nonprofit credit counseling company that promised to teach consumers how to manage their finances for no up-front fee. But they did ask for what they called “voluntary contributions” to enroll in the program. The FTC alleged that the company kept these up front “contributions” as fees without the consumers’ knowledge, rather than disbursing the money to consumers’ creditors as promised.

That company is not the only company who deceived consumers. There are many and you need to be on the lookout for them.

All that being said, states are addressing the growing problem of debt consolidation scams and unscrupulous companies. For example, the Nonprofit Credit Counseling Act, enacted by the 2004 Virginia General Assembly, imposes stricter licensing standards and a bonding requirement of up to $350,000 for licensees. Applicants for licenses must submit to the Bureau of Financial Institutions a copy of their Debt Management Plan Agreement, an accreditation certificate, and independent evidence that their credit counselors are competent to provide debt management assistance.

Lump-Sum Payment Used As Settlement Offer - A Bad Idea

Some debt settlement programs require a deposit (or automatic withdrawals) of a sum of money which they put into a special savings account. When the account has reached a certain level, the debt settlement company makes an offer of settlement to one of your creditors for a lump-sum payment that will settle the account. Although this approach may work in some situations, most of the time it causes more harm than good.

The first thing they advise you to do is immediately stop paying your debts. That alone is a bad idea. If you don’t pay your creditors, the total amount owed only increases, getting you farther into debt. Not only does your debt increase, but part of your monthly deposit to this special savings account is taken by the settlement company in fees. The fees can range from 15% to 20% of the total amount of the outstanding debt. Think about that – its 15% to 20% of the outstanding debt, not of the settlement amount. Let’s say you have a $10,000 balance - that makes the fee to the settlement company somewhere between $1,500 and $2,000. Also, if you want to settle a $10,000 debt in 6 months, it would require a deposit of $833 each and every month into that savings account. If you have that kind of money, perhaps you wouldn’t be in debt.

As you continue to try to save enough to make a settlement, which is now a moving target, you get farther and farther away from reaching your goal of getting out of debt.

It also results in many frequent telephone calls from your credit collections department. We can assume that you are already getting these calls, so you can see that it will only make things worse. If you stop making payments, some creditors will send your account to a third-party collector who may even be more demanding with their collection calls, some will assign your account to an attorney and some will do both. And this method only multiplies the damage to your credit score because it is now full of negative 30, 60, 90 days or more of late payments, perhaps even charge-offs or judgments will occur.

You would have been much better off on your own making minimum payments; or better yet, paying the minimum plus a little more toward the principle to wipe out the debt.

Participating in a Debt Management Program Will Affect Your Credit Report

The truth is a debt management program is a hardship program. Creditors will know you are participating and use it as a red flag that will surely limit your options. Simply using a debt negotiation program will lower your credit score for as long as you are in the program.

A False Feeling of Less Outstanding Debt

Using a debt consolidation program may make you may feel like you have less outstanding debt. For example, your credit cards will now have larger amounts of available credit. If you pay off your credit cards but continue to use them, you will quickly max out your credit again and end up with more debt and more anxiety than you had before you chose debt consolidation. Instead, close your credit cards and don’t use them again. At least not until you have fully recovered your credit worthiness.

Companies Neglecting to Make Payments

Some companies have been known to neglect making timely payments. Some even miss payments all together. That reflects on your credit but does not harm the company at all. Be careful to investigate an agency's background before signing up with any agency.

Online Debt Consolidation - Never

Never, never complete an online form which asks for personal information.

Too Good To Be True?

Do we really need to tell you that “If it’s too good to be true, it probably is”? Take a look at the claims we found on some debt consolidation web sites:

Become DEBT FREE in 15 Seconds
Reduce Debt by 75%! Fast and Easy.
Slash Your Interest Rates to Zero!
Erase Negative Information from Your Credit Report
We guarantee that we can remove your unsecured debt
We promise that unsecured debts can be paid off with pennies on the dollar

The Internet is filled with ads by debt consolidation companies that promise to erase accurate negative information from your credit report in exchange for a fee. These are scam artists who run these ads and they do not deliver on their promises, they can't deliver. Only time along with a conscientious effort and a plan to repay your bills will improve your credit report. Be skeptical of any company that advertises outrageous claims.

Scams

Be wary of any company offering free debt consolidation. No company gives away their services for free. They couldn't stay in business if they did. Particularly watch our for these scams.

Free Credit Report Scam

You should really look out for this one. This internet scam takes advantage of people who want to check their credit reports to check for accuracy or signs of identity theft. The theme of the credit report scam is to capture your personal information so that they can provide you with a copy of your credit report. You must complete an online form. They call it “Personal Identifiable Information” (PII). They say they need this information to stop identify theft. However, the imposters, posing as a business, use your personal information themselves and steal your identity.

Click here to find out how to get a legitimate free credit report.

Create a New Identity Scam

If you have a bad credit history with excessive debt, or if you recently filed for bankruptcy, you may be the target of a scam known as “file segregation.” This scam promises to hide your negative credit history by establishing a new credit identity for you by giving you a new social security number, essentially erasing (actually hiding) your debt. The bad news is – file segregation is illegal. It is a federal crime. If you follow this advice, you could face fines or even a prison sentence. You should know that the federal government does not support or work with companies that offer such programs.

Dispute ALL Negative Information in Your Credit Report Scam

Some companies may advise you to dispute all negative information on your credit report, even if the negative information is accurate. If you follow this illegal advice and dispute correct negative reporting you are committing fraud and will be subject to prosecution. In addition, if you do this via the phone or mail, you could be prosecuted for mail or wire fraud. You don’t need to add that to your financial troubles!