Debt Repayment Programs: Too Good To Be True?
We frequently see clients who are participants in these credit consolidation programs. Unfortunately, the vast number still resort to having to filing for bankruptcy.
It is almost impossible to watch TV or listen to the radio these days without watching or hearing an advertisement for debt repayment or credit consolidation programs. In the wake of the burst of the housing bubble and the financial meltdown that has ensued, more and more companies want you to enlist their help to get out of debt. While not all of the companies and law firms doing this work are culprits, many of these organizations who claim to offer assistance, will only hinder your efforts to resolve your financial problems.
At Molleur Law Office, we frequently see clients who are participants in these programs or whom have participated. The most common complaint we hear from these clients is that they were required to pay a lot of money but that they received no real benefit. The vast number resort to bankruptcy.
How do these debt repayment companies work?
Many companies engaged in the business of "helping people get out of debt" require substantial fees for the work they "promise" to perform.
After providing your financial picture to them, they will assess the requirements for a successful repayment plan. Many companies will not consolidate all of your credit card debt. They will package some debt but will leave you with cards that you will have to continue making monthly payments on, outside of their plans. The cards they do agree to include are usually negotiated at lower interest rates and occasionally lower principals, though this is rare. The result is that you will pay a monthly fee for several cards, while you will still have other credit card bills continuing to make your situation difficult. Even if all of your credit cards are addressed in one of these plans, the monthly costs are usually too expensive to be realistic.
How do these debt consolidation companies get paid?
Here lies the rub - part of your monthly payment will go to pay the debt management or credit consolidation company.
Many companies require that you pay their fees upfront which could be substantial. Often the first several payments made while participating are to cover the fees. This means that your creditors receive nothing until those fees are paid! Often, people who are overwhelmed by debt are only able to make the first few payments to these companies. These payments are never applied to their debts and so they end up paying a company for work that is never preformed. Other companies charge a monthly fee for participating in the program. While this arrangement is better, you should review the fees and your monthly payment amounts and compare them to what you were required to pay your creditors before entering the program. I have seen instances where clients were paying less on a monthly basis, but more overall when interest payments and debts consolidation fees were compared side-by side.
Won't my credit be better protected in one of these debt consolidation programs as opposed to bankruptcy?
Short term, maybe. Long term, well...
In the short term, the answer may be yes, that your immediate credit score won't be as damaged as it would be if you filed a bankruptcy. But over the long term, your inability to resolve your credit issue will hinder your credit. Because these companies often do not release funds to your creditors until their fees have been paid, your credit is often harmed while you are trying to pay the company's fees. Your credit will not begin to recover until after you have repaid your debts - that could be several years! While your credit will be damaged after filing a bankruptcy, it can often be revived and repaired much faster than through enrollment in a debt management program.
Top 5 Things to Be Aware of Regarding Debt Management and Credit Consolidation Programs:
- Read the terms and obligations of proposed payment contracts carefully.
- Understand your obligations, know when your payments are due, and know how long you will need to be in the program.
- Make sure you understand how your monthly payments are applied to the company's fees and to your debts.
- Be wary of companies who withdraw your payments directly from your bank account and be sure you know how to stop this practice if your contract requires that you enter into this kind of payment arrangement.
- Make sure you check on the company's reputation before signing up - the fact that the company is on the Better Business Bureau website does not necessarily mean it has a stellar business record.
Think long and hard before entering into a debt consolidation program. The marketing and abundance of these programs presents a picture almost too good to be true. Most often, it is.
- Maine's Bureau of Consumer Credit Protection website: www.credit.maine.gov
- Federal Trade Commission - Consumer Protection website: www.ftc.gov/bcp/edu/pubs/consumer/credit/cre01.shtm
- Maine's Attorney General's Consumer Protection website: www.state.me.us/ag/consumer/index.shtml