A lot of clients come to me after being in debt consolidation programs for a while. Typically, they have spent several thousand dollars on “credit counseling” or “debt consolidation”. After months of paying into a program they figure out that their debt has not actually gotten any lower, their credit, once bad, is now destroyed, and they are no closer to a fresh start than before.
Debt consolidation works for some folks. Some people are actually able to take a pile of high interest debt and turn it into one low monthly payment. Usually, these folks have OK credit and are able to get a better loan or have some collateral to offer a lender. Most that I see get put into a “debt settlement program”.
Most “debt settlement programs” or “debt management programs” work something like this…
A person calls an advertisement on late TV. Soon they are paying a few hundred dollars monthly to a debt settlement company. The company sends letters to the creditors asking them to begin negotiations. The credit card companies have a few choices…
They can chose to work with the settlement companies- this means that after the debtor pays into the settlement program for a few months, the debt settlement company will pay off the now charged-off balance to the credit card company. This allows the debtor to get out of the debt for less than the whole amount owed. Sounds pretty good, right?
Not so fast- first, your credit is pretty well shot at this point. Next, your have tax issues at the end of the year. Debt resolved through forgiveness is taxable. That means if you settled $1000 in credit card debt for $500, you get to pay taxes on $500. But, it could be worse.
Sometimes credit card companies decide not to work with debt consolidation companies. This is when the nightmare really begins…
First, your already bad interest rate gets worse. Credit card companies will move you to what is called the default interest rate. This means that the amount you owe each month in interest mushrooms. Next, the balance will be accelerated. This means EVERYTHING you owe is due now. You think this is not a problem because the debt settlement company will fix it, right? WRONG! UNLESS THE CREDIT CARD COMPANY AGREES TO WORK WITH YOU, THE DEBT SETTLMENT COMPANY HAS NO LEGAL RIGHT TO FORCE THE CREDIT CARD COMPNAY TO DO ANYTHING.
The result when this happens is ruined credit, potentially garnished wages, a higher interest rate, and no real solution in sight. Oh, and on top of that, the debt settlement company keeps your money.
What a bargain.
Does bankruptcy have drawbacks- certainly. No doubt bankruptcy will hurt good credit and be potentially more embarrassing than debt settlement. However, bankruptcy is the law. Credit card companies can’t ignore bankruptcy. Also, one way or another, bankruptcy will resolve debts.
Bankruptcy- it’s not a con game, it’s the law.