If It Sounds Too Good To Be True…
I often tell clients "if it sounds too good to be true, it probably is." Nowhere is that more prophetic than in the phony "debt elimination" service scams currently being run around the country. Whenever there are more debtors, there are more people who prey on debtors. In many cases, these are companies without conscience.
"Reduce your debt by as much as 70%! Eliminate your credit card debt without bankruptcy!" The advertisements seem to suggest that you can simply take charge of your finances and eliminate debt. They imply this is due to changes in the law. But at the core of their programs are one of two different approaches: debt consolidation loans or quasi-lawful debt elimination tactics.
For a large number of the "debt elimination companies" the program they offer is really to get you into the front door, find out if you have assets like houses and cars, and then offer you a secured loan on your property in order to refinance your personal credit card debt. They only accept clients with debts over $10,000 because only in those cases can they derive a hefty profit.
Because you have credit card debt, your credit score may not be very high. The service may use a loan provider who charges interest rates as high as 20%, and who secures the loan with a second mortgage on your primary residence. Generally speaking, if you have dug yourself into a hole with debt, you have to throw away the shovel, not use it more often. A debt consolidation loan effectively means that if you suffer additional credit issues, you're likely to lose your house, your car, and many of the things you've worked for. For the vast majority of people, a debt consolidation loan, without a change in the behavior that led to the need for the loan, is merely a temporary fix.
Additionally, many of the debt consolidation loan providers do not negotiate significant discounts with the creditors. If you look carefully at the ads and the disclaimers you'll see things like "...up to 50% reduction..." In other words, at one time they got someone a reduction of that amount. When you read the glowing testimonials "you reduced my $20,000 in debt to $5,000 which I paid off..." you'll see disclaimers later that say "results not typical." Disclaimers are always in the fine print.
If you truly have credit card problems, the best solution may be a non-profit service like Consumer Credit Counseling. These agencies do not exist to make a profit and have a good track record of helping people not only settle debt, but learn to make responsible credit decisions.
But far and away the worst possible type of debt counselor is the one who suggests that he or she can simply "eliminate" your debt. The theory espoused by these folks is that in many cases, the creditor cannot prove what you owe, and that they'll be willing to take pennies on the dollar in order to settle your debt. While it is true that in collection lawsuits many times the cases falter because of a lack of proof, the fact is that whether the creditor's records will support a lawsuit later is not something your "counselor" can really know. Only the creditor knows.
At the inception, these "debt elimination" agencies tell you to immediately stop paying your credit card bills. They advise that after a certain time, usually about six months of not paying the bills, they will step in, negotiate a debt reduction, and help you pay off your debt.
They will often agree to hold your payments - the payments you would normally have made - in escrow or trust accounts. They will encourage you to borrow from your retirement or take out a second mortgage in order to put 50% or 60% of your current debt load in their "trust account." They use that money to pay off the credit cards after six months, and return some portion of it to you. For the six months that it sits in their "trust account" they pocket the interest on the money - not you!
The problem, of course, is that this refusal to pay your bills has an immediate effect on the quality of your life and on your credit rating. Your credit rating affects insurance companies and how they evaluate your risk. Your car insurance will go up because the insurer might rightly believe that people wreck their cars and claim injuries when they are desperate for money. Your house insurance will go up because most arson fires are started by someone who wants some quick cash and considers an insurer a good source.
It also affects your ability to live your life. You won't be able to borrow money. You won't be able to finance a car. Your phone will ring off the hook with calls from credit card companies looking for their money. You'll get letters from debt collectors. All of them will threaten you with lawsuits.
The real problem is that the "debt eliminator" has no control over the creditor. While the creditor is not likely to sue you within six months, nothing prevents a lawsuit after one or two months of no payments. A lawsuit stands as an even blacker mark on your credit rating than does the missed payments. If you get sued the debt eliminator has no obligation to defend you (it's in their contract). You may also not be able to get back the money you put in trust to satisfy the judgment taken against you (it may already be spent). And while many credit card companies will negotiate down a $10,000 account to $3,500 to $4,000 under the right circumstances, nothing says they have to. If they demand their full penalties and interest, a $10,000 credit card debt can quickly become a $13,000 credit card debt after six months when the credit card company accelerates your interest rate as most of the contracts provide.
The safest way to deal with a credit problem is to go see a non-profit credit counseling service, or a lawyer who specializes in representing debtors. All of the scams that sound too good to be true are, to one extent or another, too good to be true. The devil is in the details (or the fine print) and you may later regret getting involved with a company that promises to help you, and winds up hurting you.