DEBT MANAGEMENT AND NEGOTIATION PLANS
You can barely turn on a television or listen to a radio without listening to a catchy jingle about some debt plan that will allow you to get out of debt for a fraction of what you owe. Are these plans legitimate? Do they really work? How do they work?
CCCS. Probably the oldest of these plans is the Consumer Credit Counseling Service (CCCS). This is the oldest and most reputable of these programs. It does a good job although it is something of a wolf in sheep’s clothing. It is funded by the credit industry to proactively assist consumers who are in debt trouble. Of course the solution is to pay a healthy sum to the very same creditors who run the program.
The program can be somewhat embarrassing and condescending. Part of the program is education. The education about finances, budgeting and priorities is a good message if not rather simplistic. The second part of the program is that CCCS then arranges a forbearance of your debt so that no interest, late penalties or other fees accrue while you are part of the program. The tradeoff is that the debt is excused ONLY if you complete the program.
One drawback is that not all creditors are part of this plan and may not negotiate with CCCS. If so, the whole plan may crater. The second is that it usually involves the payment of all or virtually all of your credit balances during the time that you are in the plan. It also operates somewhat like bankruptcy or the IRS (take your pick): “How much money do you make? $_____. Send it all in. So it takes a lot of discipline.
There is also a restriction on obtaining new credit during the plan. And the final injustice is that most creditors will still report adverse information to Credit Reporting Agencies even while you are successfully participating in the plan or after you have successfully completed the plan. Granted, the report may be better than a total write off, but not much better.
And, like almost any payment plan with a creditor, the creditor is obligated to accept the plan ONLY if the plan is in writing. And the creditor usually imposes a condition that there will be NO final forgiveness of the debt unless you COMPLETE the plan. For instance, you may agree to make 10 payments of $500 to settle a debt of $6,000.00. Depending on your perspective this may or may not be a good deal. But if you pay nine installments but miss the 10th, the deal is cancelled. You will get credit for the $4,500.00 that you paid but you will not owe $500.00. Instead, you will owe the difference between $6,000.00 and the $4,500.00 that you paid PLUS you will owe all the accumulated interest and penalties. Thus, do NOT enter into one of these programs unless you are confident that you can complete the program.
Other Programs. The companies that aggressively advertise on TV, radio and by email offer a different twist. They operate on a promise of inside information about the credit industry. As with all great scams there is a thread of truth in their message. Briefly, the message is: When you fail to pay your obligation to a creditor, the creditor goes thorough a progression of efforts to collect the money. The progression begins with gentle reminders and can go as far as lawsuits and the seizure of assets. However, each creditor approaches that progression differently. Some will stop at level three of 10. Some will stop at level 7 and some will analyze your ability to pay to determine how aggressively they will collect. These debt negotiators will claim some inside knowledge about how to collect the debt and that their special knowledge will save you a bundle of money.
Their second premise is that the longer that a debt goes unpaid, the less a creditor will accept in satisfaction of the debt. Once again, there is some truth in this. It is most true for those persons who already have bad credit and owe everybody in town. Creditors are happy to get 40% of their debt from these folks.
But if you have been paying your bills there is a different response. These programs do not work as well, if at all , if you want to do so because you are looking for a shortcut tunnel through the mountain of debt.
Debt Negotiators and Scam Artists. There are legitimate honest debt reduction companies. But many are not. Debt negotiation companies are seldom regulated. Once you understand the business you know that it offer a blank check to a Get Rich Quick Scam Artist. If you decided to use such a company you should understand that their “program” will work something like this:
- Sales pitch of the Stress free life you will enjoy with Debt Free Living;
- Analysis of your financial situation;
- Promise of your personal debt reduction savings, usually at between 60 and 75% of your total unsecured debt;
- Introduction of “reasonable fee” of 15% of your total debt;
- Arrangement for automatic debiting of your bank account for the planned periodic debt installment payment. You will pay this installment to the Debt Plan instead of paying any of your creditors;
- Debt Plan promises to negotiate your debts for you. But the first part of the process is to let the debts “mellow” with age. In the meantime the monthly debt payment is allocated to the fees of the Debt Plan.
- The Debt Plan has a simple strategy: Don’t pay your obligations and wait for your debt to be forwarded through the debt collection process. To impress you the Debt Plan may send toothless “cease and desist” letters to your creditors htat may vaguely assert certain legal rights you may have. Unfortunately these letters are often used improperly and are ineffective.. In some circumstances the Debt Plan may wrongly assume that the “cease and desist” letter is a magical shield that will protect you from all harm. At this point the Debt Planner is perilously close to the unauthorized practice of law and bad advice at this point can be devastating to your financial future.
- A full program as designed by the Debt Planner may last several years. For instance, if you are to pay $500 per month for 60 months to a Debt Plan, what are you going to get? You should also know that the chance that a participant will complete the program is very low. What happens to YOUR money? (If you carefully read the plan document you will realize that the only creditor you satisfied was the Debt Plan. They got their money in full and up front. And did not successfully enter into an agreement with ANY creditor.)
- So you sign up for the debt plan and forward your hard earned money to the Debt Planner. Now what? Well, collection departments will eventually start calling you. The Debt Plan will tell you to forward the debt collector calls to them. What if the Debt Plan totally irritates the debt collectors by refusing to deal with them until “the time is ripe?. What if your Debt Plan does not have a secret insight into the Collection Plan of your major creditor? What if your Debt Plan has such a poor reputation that no creditor will deal with it?
- ”If so, the participant is back to the same place as an incomplete CCCS program (see above). You also need to know what will happen to the money that you pay to the debt negotiator. Is it placed in a trust account? A general fund to pay the expenses of the debt negotiator? Are your funds segregated? When and how will a creditor be paid? What are the qualifications of the debt negotiator?
- What do you get from the Debt Plan when it is over?
Summary. A Debt Reduction Plan is not easy . It requires a lot of discipline and sacrifice. And one of the things that you want to achieve is an intact credit rating. What will the program do to your credit rating? Almost all wil have some adverse impact. Will it be a minor ding? Or will it make you radioactive to a potential lender for a decade? Is bankruptcy a better alternative? Can I do it myself? If I obtain assistance who should help me?
I offer a debt consultation to explore these options with you. I do charge a fee and I may be able to help you. But I will not try to sell you a Debt Plan or a bankruptcy or ask you to enter into an installment plan. It will just be some good honest analysis and an explanation of some options. Call me for such a consultation.
