Debt Reduction Companies - What to Watch Out For
- Date: 2007-02-01 - Word Count: 821
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Question:
I have recently heard of agency out there that will reduce your
debt by 70%, just by them somehow talking to them [your
creditors]? Do you know anything about this method? Is it legit?
I have even heard it on my local radio station and they talk like
it is totally legit. - Kevin
Answer:
It really depends on what they mean by "reduce your debt by
70%" and most likely it is "up to 70%" and not all customers can
get a 70% debt reduction.
What could this mean?
Several things. One could be bankruptcy. Several "companies"
and "debt counselors" are just fronts for bankruptcy attorneys.
A Chapter 13 bankruptcy can significantly reduce your debt. All
your creditors get notified and have to respond in order to
maintain their claim on you. If they don't respond, they lose out
and you don't have to repay the debt.
A judge will then look at your income and decide what you can
afford to pay toward your debts each month. S/he then decides
how long you will make payments and what portion of each
payment goes to which remaining creditors.
But, of course, a bankruptcy on your credit report completely
hoses your credit. You can still borrow money, but you will be
paying 25% rates and it will cost much more in the long run.
Also your bankruptcy may not be approved and you could end
up owing the attorney money for his/her time.
OR it could be a form of debt negotiation. The company calls up
your creditors and tells them that you are considering
bankruptcy. If they want to help you avoid bankruptcy (and thus
preserve your debt to them) they must either lower the amount
you owe, reduce the interest rate, or halt the interest charges.
Sometimes this works, sometimes not. But when a creditor
writes off part of your debt, they usually report it to the credit
agencies and it appears on your credit report and also
adversely affects your credit scores. They may also flag your file
as a possible bad debt and later deny you additional credit or
services.
OR it could be that they are trying to help you lower your
monthly payments, usually through a debt consolidation loan,
home equity loan or a complete refinancing of your home. If this
is the case and you don't own a home, they will quickly "refer
you to someone who can help" (yeah, right!) because they are
just looking to make a quick $5000 on loan fees. These
companies are just fronts for mortgage brokers.
OR other companies want you to make a single payment to
them and offer to pay your bills for you. They use teasers like
reducing your debt 70% to get you in their door. While it may
seem nice to only have to make one payment instead of 10,
there is usually a hefty start-up fee and you pay the company
monthly fees of up to $50 or more for this service. (10 stamps
are much cheaper.)
The problem with this arrangement is that you have not done
anything to change the habits and actions that got you into
trouble to begin with. And you have no direct feedback as to
how the debts are being paid off. And if the company should
have financial troubles and miss some of your payments, your
credit report could get hammered (this happened in Utah
recently).
These companies realize that you probably will continue to get
further into debt, but by doing this you will continue to be a
good customer for them. If they make money off of you, they
have a motive to keep making money from you. So do they
really want to see you get completely debt free or just remain a
steady customer?
Watch out for companies that want a large up front fee (more
than $200) or will charge monthly fees to manage your bills.
Watch out for companies that claim they can clear up your credit
report; some try illegal tactics that will get you (not them) into
trouble. Remember you are considering employing them to
negotiate with your creditors on your behalf; be sure you know
exactly what they are going to do and say. If they don't disclose
their methods, watch out.
Also remember, just like they say, "Don't believe everything you
read," don't believe everything you hear, especially in
advertisements. Radio and TV stations generally do not take
much responsibility for what their advertisers say; that is up to
the FCC and FTC. If you purchase an ad you can pretty much
say what you want so long as it doesn't get the station in
trouble. Check out some 2 a.m. infomercials; they are a hoot!
David Berky is president of Simple Joe, Inc. makers of the popular Debt Eraser PC software which helps to create a rapid debt reduction plan to get out of debt much sooner and save $1000s in interest. Visit http://www.simplejoe.com to learn more.
I have recently heard of agency out there that will reduce your
debt by 70%, just by them somehow talking to them [your
creditors]? Do you know anything about this method? Is it legit?
I have even heard it on my local radio station and they talk like
it is totally legit. - Kevin
Answer:
It really depends on what they mean by "reduce your debt by
70%" and most likely it is "up to 70%" and not all customers can
get a 70% debt reduction.
What could this mean?
Several things. One could be bankruptcy. Several "companies"
and "debt counselors" are just fronts for bankruptcy attorneys.
A Chapter 13 bankruptcy can significantly reduce your debt. All
your creditors get notified and have to respond in order to
maintain their claim on you. If they don't respond, they lose out
and you don't have to repay the debt.
A judge will then look at your income and decide what you can
afford to pay toward your debts each month. S/he then decides
how long you will make payments and what portion of each
payment goes to which remaining creditors.
But, of course, a bankruptcy on your credit report completely
hoses your credit. You can still borrow money, but you will be
paying 25% rates and it will cost much more in the long run.
Also your bankruptcy may not be approved and you could end
up owing the attorney money for his/her time.
OR it could be a form of debt negotiation. The company calls up
your creditors and tells them that you are considering
bankruptcy. If they want to help you avoid bankruptcy (and thus
preserve your debt to them) they must either lower the amount
you owe, reduce the interest rate, or halt the interest charges.
Sometimes this works, sometimes not. But when a creditor
writes off part of your debt, they usually report it to the credit
agencies and it appears on your credit report and also
adversely affects your credit scores. They may also flag your file
as a possible bad debt and later deny you additional credit or
services.
OR it could be that they are trying to help you lower your
monthly payments, usually through a debt consolidation loan,
home equity loan or a complete refinancing of your home. If this
is the case and you don't own a home, they will quickly "refer
you to someone who can help" (yeah, right!) because they are
just looking to make a quick $5000 on loan fees. These
companies are just fronts for mortgage brokers.
OR other companies want you to make a single payment to
them and offer to pay your bills for you. They use teasers like
reducing your debt 70% to get you in their door. While it may
seem nice to only have to make one payment instead of 10,
there is usually a hefty start-up fee and you pay the company
monthly fees of up to $50 or more for this service. (10 stamps
are much cheaper.)
The problem with this arrangement is that you have not done
anything to change the habits and actions that got you into
trouble to begin with. And you have no direct feedback as to
how the debts are being paid off. And if the company should
have financial troubles and miss some of your payments, your
credit report could get hammered (this happened in Utah
recently).
These companies realize that you probably will continue to get
further into debt, but by doing this you will continue to be a
good customer for them. If they make money off of you, they
have a motive to keep making money from you. So do they
really want to see you get completely debt free or just remain a
steady customer?
Watch out for companies that want a large up front fee (more
than $200) or will charge monthly fees to manage your bills.
Watch out for companies that claim they can clear up your credit
report; some try illegal tactics that will get you (not them) into
trouble. Remember you are considering employing them to
negotiate with your creditors on your behalf; be sure you know
exactly what they are going to do and say. If they don't disclose
their methods, watch out.
Also remember, just like they say, "Don't believe everything you
read," don't believe everything you hear, especially in
advertisements. Radio and TV stations generally do not take
much responsibility for what their advertisers say; that is up to
the FCC and FTC. If you purchase an ad you can pretty much
say what you want so long as it doesn't get the station in
trouble. Check out some 2 a.m. infomercials; they are a hoot!
David Berky is president of Simple Joe, Inc. makers of the popular Debt Eraser PC software which helps to create a rapid debt reduction plan to get out of debt much sooner and save $1000s in interest. Visit http://www.simplejoe.com to learn more.
Related Tags: personal finance, debt reduction, simple joe, debt reduction service, debt reduction company, debt reduction agency
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