Don’t Be Misled by Debt Consolidation Scams

About a year ago, when my debt was spiralling out of control, I heard an ad about a debt consolidation program that sounded too good to be true. Well, you know the old adage – “If it sounds too good to be true, it probably is.” It was.
My first clue that all was not well with this program was that it was the second one I had tried. The first one said they could not help me because one of my creditors would not agree to the program. The second one, the one I used, said there would be no problem. That should have tipped me off, but, unfortunately, it didn’t. They were honest about the fact that my credit would take a hit; they just weren’t honest about why.

The idea of a debt consolidation program is pretty logical and appealing. Take all your unsecured debt payments(credit cards)and consolidate them into one affordable monthly payment. While doing this, the company I worked with also promised to get my creditors to accept less than what I owed them and to have me out of debt in a little over three years. Well, compared to the sixty years it was going to take me, at the rate I was going with making only the minimum payments, that sounded wonderful! When they asked for a small fee up front, another clue, I readily gave it to them.

What they didn’t tell me is how their program actually works. The reason it works at all is because the company patiently waits for the creditors to lower the debt people owe. Sounds simple enough, but it is really misleading. I made my payments (about the same amount that I had been paying to creditors) to the debt consolidation company instead of to my creditors. I had a lot of misgivings about this, another clue, because I couldn’t imagine that my creditors were going to like not being paid. They didn’t. The company I was paying sent me a schedule of payments, after I became a member (as they called it) and I then found out that the first several payments only went towards paying their fee – a considerable sum of $10,000 and a huge clue- over the next few years. The monthly fee would go down as time went on, and money would begin to accumulate in a trust fund to eventually pay my creditors. Well, in a nut shell, my creditors were going to be paid nothing for several months and some of them not for years. They were not going to receive any money from me until they could be paid off in full, and they were going to have to accept far less than what I owed them if the “plan” was to work out.

As you can imagine, my creditors were not too happy with this arrangement, and neither was I. I had mailed them all letters at the beginning of this fiasco asking them not to contact me by phone. These letters were sent at the debt consolidation company’s request, another clue, and nothing was sent asking them to participate in this program. In other words, this company was not officially contacting my creditors or making any type of legal arrangements with them. No wonder my credit was going to take a hit!

The letters I sent did stop most of my creditors from calling me, but it did not stop them from sending me threatening letters or statements showing late fees and larger minimum payments (My balances were actually going up because of lack of payments, late fees, and interest). When I talked to my representative at the debt consolidation company about this, she told me not to worry because my creditors were just trying to get their money. I had only been in the program for a couple of months, mostly because I felt I had come too far to give up on it, when I received a phone call from one creditor who had sent my account to a collection agency. He said my letter tipped him off that I was using an unreliable debt consolidation company who had no agreement with them. He explained everything I now know, including the fact that this type of company only works for about 2% of the people who sign up with it. This is because very few creditors are willing to wait indefinitely for any type of payment, and very few people can stand the pressure of threatening letters and being turned over to a collection agency. I couldn’t, and I also couldn’t get over the fact that if I could afford to pay this company over $10,000, why couldn’t I use that money to pay off some of my debt?

What I found out later that day was even more interesting to me. Many people may know, but I did not, that if you call your creditors directly and tell them you are having problems making your payments, they will put you on a payment plan. They will lower the interest, or get rid of it all together, and lower your minimum monthly payment. No one will be charging you any fees, and you will not be receiving anything threatening in the future. I also found out that no matter how good your intentions are, once something is turned over to a collection agency, it stays in the collection agency until it is paid off in full. Collection agencies are not as willing as creditors to be forgiving and help you with a lower payment.

As this point, it was too late for me. I had already put out a few thousand dollars, that I could ill afford, to a company that only succeeded in getting me into more of a mess than I already was. I also found that I could not “quit” the debt consolidation company and had to close my banking account and start over because they would have continued to automatically withdraw the same amount every month for the next three years.

This has been an expensive lesson for me. I know that many of you are experiencing similar problems in this economy and with so many people out of work, there are bound to be those of you in a situation like I was. While there are probably reputable debt consolidation companies out there, beware. Find out what the small print says and just how much this will cost you – both financially and to your credit. Start with your creditors if you are having difficulties paying them. They will try to help you, because no matter what a debt consolidation company says, they really do just want their money back.

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