Debt Relief
Posted by Gail | Filed under Credit Wise
Sometimes it feels like you’re in an impossible situation. You’ve tried getting a consolidation loan, but with the tight money markets and your crappy credit history no one wants to be your lender. So you look at the ads for credit counseling, debt consolidation and debt relief companies and think, “Maybe this is the answer.” If you’re thinking about getting some help, here are some things you need to keep in mind.
With any debt management plan, you make your payment to the company you’re dealing with and they distribute most of that money to your creditors. (Yes, they all get their pound of flesh, so you are PAYING for this service, even if it doesn’t feel like it.) So you only have to make one payment. For their fee, these organizations lower your interest costs and eliminate fees so more of your payment goes to your balance. But if you’re dealing with lenders who won’t compromise, your debt-management plan won’t work as well as if your creditors roll over.
You should research the company with which you’re going to deal very carefully since these organizations range in quality and are springing up like seeds on a Chia-pet. We’re talking about fixing a problem here, not making a bigger problem. You need to be absolutely sure this is going to work in your favour (when all the costs are counted) before you proceed. Get it in writing. Understand all the terms and conditions. And don’t take, “If we can’t help you, we won’t charge you” as a guarantee. That just means they’ll leave you high and dry if their negotiation fails.
Often when you enroll in a debt settlement plan you will be told to make no payments to your unsecured creditors. This will have two outcomes:
(1) you’ll save the money you would have been making in payments to establish a debt settlement pool, and
(2) your creditors will watch your account go into huge arrears, making them more willing to negotiate a settlement.
After several months your debt management company will contact creditors and attempt to negotiate a favourable lump sum settlement that will be paid out of your debt settlement pool. Know that if you take this route your credit history will be shot. If you already have a crappy credit history this may not be a problem for you. But if you’re in the least bit concerned about keeping your credit score shiny, this isn’t the way to go. And if this negotiation tactic fails, you’ll not only be even further in arrears, you’ll likely have seen your interest rates zoom into the stratosphere.
While each organization is different, the plans they come up with are pretty much all the same since lenders don’t give preferential treatment to any one company. Your debt management advisor determines how much it will take to pay your creditors off in three to five years. The main benefits are that the interest clock is slowed down or in some cases stopped completely and that collectors stop calling. And you usually have the option of paying more when you have extra money so you can get back into the black even more quickly.
One of the big drawbacks of using a debt counseling or debt management company is that most don’t come with any serious advice so people often fulfill their commitment and then go right back out and rack up their debt again. You need to work with a company that does a full assessment of your financial picture. If the company only deals with the debt, you’re at risk for being a repeat offender. If you’re working with someone who is knowledgable and compassionate, the process can be smooth. If your advisor sees you as just one more customer, if she is judgemental, if he is pushy, you need to find another counselor.
You shouldn’t think that debt management is the easy way out. You still have lots of work to do. But if you’re getting the right kind of guidance this can be easier. Be careful however. The last thing you want to have happen is that you get to the end of the process only to find it isn’t the end: that there are fees and interest rates that have accumulated throughout the process and you’re still on the hook. Yup, it’s happened.
Debt management is not right for everyone. I’ve seen people enter into the process and then accept credit and start charging again. Dopes. If you’re not committed to living without credit, don’t even bother getting started. You’re often required to commit to living without credit until you’re debt free, and if you break this rule there can be dire legal consequences. Also keep in mind that this kind of service works best for those with unsecured debt, like a credit card or unsecured line of credit. If you owe taxes, child support, or on anything for which someone else is signed, this won’t work.
Perhaps the biggest surprise for most people is the fact that consolidation, credit counseling and debt management may not BE bankruptcy, but they are often treated as such by future lenders. Your credit history will take a hit that last as long (or longer, in some cases) than bankruptcy. Anything that says, “He couldn’t manage his bills” is a red flag for lenders.
I’m not a big fan of any of these services. I believe:
1. If you can’t keep a roof over your head and food in your belly, and pay off your debt in three years or less no matter how hard you work, you need to go and see a bankruptcy trustee. You are exactly the person bankruptcy was meant to help, and if you just can’t make it work, bankruptcy may be your only option.
2. If you can make your payments, then you need to call and negotiate with your creditors, come up with a plan and follow through. Taking personal responsibility is the only way to make sure you NEVER make the same mistakes again. And if you don’t have the wherewithal to make this better, it’s only a matter of time before you are back in the hole. It’s your money. Now it’s time to take control of it.
December 8, 2009 at 10:39 am
Thanks for another great post Gail!
Being the type to see the glass half full, I thought it would reflect more positively on you when using the services of a reputable debt management counselling service. Would creditors not take into account that you are making a real effort to pay off your debt instead of declaring bankruptcy and leaving them with nothing? Of course, this may not apply to ‘repeat offenders’…
For many people, bankruptcy is the only answer; but some use it far too frequently. It shouldn’t be made easy and painless, and it shouldn’t be an option to be used repeatedly.
Today’s lenders and creditors may take a closer look and a more cautious approach with applicants with a blemished credit history. But at the end of the day, they still see the potential for interest dollars and will take the risk.
December 8, 2009 at 10:46 am
Gail, thank you for a very insightful, and accurate, article. As a trustee in bankrkuptcy, and a member of the Canadian Association of Insolvency and Restructuring Professionals, we need to do a better job as an association to ensure the public understands that a trustee in bankruptcy will provide unbiased advice to debtors in trouble as to what their realistic options are to hopefully avoid bankruptcy. However, if bankruptcy is their best or only option, people need to understand that declaring bankruptcy should not be viewed as an admission of failure, but rather, the first step in their financial rehabilitation, which will include, budgeting with the trustee’s assistance and learning to live on a cash basis without the aid of the credit they have shown they cannot properly manage.
December 8, 2009 at 11:13 am
I was not aware of the pitfalls of using a debt management service. Thankfully I’m not in a position where I need their services! But I do feel badly for those who genuinely want to get their finances fixed but are feeling powerless to make the changes independently. I agree with you Gail, there’s nothing like feeling the pain and discomfort of making the phonecalls yourself, to insist that your creditors lower your interest rates. It’s got to be a humbling experience, one that might just be uncomfortable enough to help you avoid having to do it ever again.
December 8, 2009 at 12:07 pm
Gail,
I’m not sure if you read my post yesterday about the little boy who was missing (later found with severe hypothermia), but if you did I’m sure it hit home with you since you have such a big heart and you have children yourself, so I just wanted to let you know that the little boy passed away this morning…I’m sure debt relief is the furthest thing from his parents minds today…makes you appreciate what you have…even if is only a little…
December 8, 2009 at 1:32 pm
I was WONDERING how these companies worked. I have seen a few lately on commercials. “We can lower your debt by 30%…” If it sounds too good to be true, it usually is.
December 8, 2009 at 4:35 pm
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December 8, 2009 at 5:09 pm
Young people do not understand how these companies work. Often their ads imply that somehow portions of the money owed with disappear. What is not made clear is that only potential amounts of interest may be reduced, never the actual principal debt that caused the problems in the first place. A young person I know, without consulting any “adults” went to such a company. He was surprised when his Visa balance stayed the same. Once he learned of his mistake, he was embarrassed. But to a young person who does not have any financial or money sense, this mistake is easily made. How about a little more truth in advertising with these companies so the facts are not so clouded? Chances are the people who will be taken in are the people who need the help the most.
December 8, 2009 at 6:45 pm
I was wondering more about this subject. My husband is on a OPD Plan, he is stuck on it for 3 more years but I was wondering more about this situation, would it make it difficult to get our car lease put on a loan even though he is on this plan? I don’t have that good of a credit history either but I have been paying my monthly bills each month on time. Also what about applying for a renewal in Mortgage which will be up in 3 years time too? Does it affect that also?
December 9, 2009 at 12:23 am
I completely agree Gail. Sometimes these companies do no better then one can do on their own. I’m glad we are working our own plan to get out of debt. Credit card companies love people that have been through these programs or even through bankruptcy because they know you will carry a balance and they know you are addicted to credit.
This is just another case of an industry that has popped up to fix problems that consumers can fix for themselves.
regards,
Jason
December 9, 2009 at 12:26 am
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December 17, 2009 at 12:30 pm
[...] Debt Relief « Gailvazoxlade.Com Also keep in mind that this kind of service works best for those with unsecured debt, like a credit card or unsecured line of credit. If you owe taxes, child support, or on anything for which someone else is signed, this won’t work. … Tags: unsecured debt, debt relief, Unsecured Line Of Credit, child support, credit card [...]
January 21, 2010 at 7:10 pm
My story is a positive one about Credit Counseling Programs, so I feel I need to share it!! Sorry its a little late….
I was a young and naive 21 year old who thought that I had the world in my hands and that I didn’t need to look ahead to my future.
I had just finished college and was working full time making $10.50 an hour as a supervisor. Silly me, went off and got engaged thinking that I had met the man of my dreams and that I was going to be with him forever.
I had gotten a student loan for $5000 from the bank which was co-signed by my father, but when I didn’t pay the interest charges it fell into my poor dad’s lap. Ooops, sorry dad…now I owe you five grand and let me pay it off to you slowly.
The man of my dreams got laid off of work, and I being so in love thought it would be okay to support him. $6000 on 4 credit cards in about a year which included my engagement ring (yes, my own engagement ring), gas, food, restaurants, jewellery…and really just non essential items that heck, I really really didn’t need. Oh and not to mention I was using pay day loans to help me make it through.
Now fast forward a few months to where creditors were calling every day saying they needed to collect and wanted all of their money and fast.
After enduring about 4 months of being hassled every day about money, I decided that I needed help and quick. I joined a Credit Counseling program, because really I didn’t think that there were any options left. The guy that helped me really did wake me up and got me to smell the coffee, and I couldn’t be more greatful. He cut off all my credit cards and negotiated my interest charges and *Abracadabra*…..two and a half years later I had paid my father back, was completely debt free, and had gotten rid of the one who really just let me down…and man did it ever feel liberating.
8 years later, I am 29, still completely debt free (besides the mortgage), have a great job…and am married to a guy I will be with forever! We are expecting our first child in April, have a wonderful home, $15,000 in savings and $36,000 in RSP’s…..
Whatever works for you is all that matters, and for me, my credit counselor was the best decision I could ever make.
March 17, 2010 at 4:06 pm
@ Becky, Love your story. Good luck with the new baby. May there be many blessings ahead for you.