You may find yourself deep in a soup when you have multiple loans such as credit cards, car loan and student loan, especially when you lack in the debt management skills. In such situations, you may opt for different debt relief options available such as:
- Debt settlement
- Debt consolidation
- Filing for Chapter 7 or Chapter 13 bankruptcy and others to find a way out of the debt engulfing your personal finance and mental peace.
However, before you jump in, you must know a few facts about these debt relief options as well as the debt relief companies and their working process in which they make money at your expense.
Most of the debt consolidation and debt settlement companies will make different types of claims, some of these can be true and few others will be too good to be true. One specific claim that these debt relief companies will certainly make is to be nonprofit. However, in reality, it can be far from the truth and actually they will make a lot of revenue at the expense of their clients.
These companies ideally will charge their customers in many different ways such as:
- Some charge a certain percentage of the payments made to the creditors and on the other hand
- Some may retain a couple of initial payments made by their clients terming them as their “administration costs.”
Though charging a percentage of payments as their service fees are somewhat agreeable but retaining payments altogether is not appreciable at all. This can eventually cause the clients to be considered as delinquent from the perspective of the creditors.
Therefore, in order to make sure that you ultimately work with a reliable and reputable debt relief company, you will not only need to compare the debt consolidation ratings but also look into their working process.
If you are not very sure or confident with these aspects, you are advised to take help of a reputed credit advisor or even an attorney for that matter to be on the safe side and prevent yourself from being duped by the scam companies.
Debt Consolidation example
A couple of examples of debt consolidation and debt settlement will make things clear to you and you will be cautious while making your choices.
Suppose you have an unsecured credit card debt of $20,000 and want to hire the service of a debt consolidation company after finding out they work as a nonprofit company.
- You will get the first surprise when they pocket the entire first payment made by you as your voluntary contribution.
- The second surprise may await you when you learn that you will need to agree to their business policy of collecting about 10% of all payments made by you as your continuing contributions.
- Another surprising fact is that you will slowly come to know about a lot of fees that will be charged from your down the road which typically the representative will never disclose initially when you sign the contract.
Of course these ‘contributions’ will be mentions in the “fine print” of the contract but you will hardly get the chance to go through it as the representative will apply pressure to sign the contract quickly. All these fees and voluntary and continuing contributions will put you behind your debt and your creditors triggering penalties and late fees. All these do not define a ‘non-profit company’ to anyone.
Debt settlement example
If you are still not convinced, here is another example but this one involves debt settlement. Considering the same credit card debt of $20,000 racked up assume that:
- You owe $10,000 to one credit card company
- $7,000 to another company and
- $3,000 to a third credit card company.
In this situation, also assume that you agree with the company to follow a debt settlement plan for five years wherein you will pay $250 every month to the debt settlement company. You may quickly do a little bit of mental math here and find that you save $5,000 eventually if you pay only $250 every month for five years which adds up to $15,000 only.
So far it sounds good, right? Well, in reality it is not so good this is why you should understand the truth to find out where that remaining $5,000 goes.
First you will need to know that:
- The debt settlement company is actually not doing any credit counseling
- They are in fact simply passing through your money and in the process
- They are skimming some of your money off the top for them.
Once again, this does not sound like or seem to be the perfect working process of a real non-profit company.
Close examination of the arrangement
When you examine the arrangement even closer you will stay amazed at the way these debt consolidation and debt settlement companies make money.
- Consider their admin fee factor. This may cost you something to the tune of $750 up front. The company, as per our example, will put away a couple of monthly payments made by you as their admin fee. This means, they will earn $1,500 straightaway as soon as you sign the contract and within the first two months.
- Till this time nothing goes toward the trust account. When you make your third monthly payment, the settlement company will now take away the first $50 of your $250 monthly payment as their service fee and account maintenance fee every month. That means that you will actually add only $200 every month to your trust account.
Therefore, even if the debt settlement companies claim to settle your debts for about half of the amount that you actually owe, the admin and account maintenance cost factor will prolong the period of sending them money.
Debt consolidation helps
The problem here is relatively simple. The creditor will not agree to accept the agreed half of the actual debt amount in settlement until and unless you pay it in full and expect you make your normal monthly payments.
Thank your stars that you have debt consolidation as an option to save some money in the process.