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Debt Consolidation Offers
If you carry a large amount of debt, the odds are that you've looked into different strategies for reducing your interest charges, your monthly payments, or your entire debt load. The internet is full of advertisements for all of these "strategies" and your options can seem overwhelming. What I want to talk about in this post are the offers on the internet and in the mail about debt consolidation services.
The first thing to keep in mind is that you need to be very careful about anyone who offers credit counseling or debt consolidation. The original credit counseling services were actually created by the credit card companies in an attempt to recover as much bad debt as possible, so their motives were questionable to begin with. Certainly we should all learn about the wise use of credit, but it's still kind of a fox-in-the-hen-house arrangement, and the situation is even worse now since the credit card companies are completely in bed with the government. Imprudent lending practices are now backed up by a bankruptcy bill that doesn't protect consumers at all, which means that the credit card companies are now legalized loan sharks, pure and simple.
Desperation has spawned a new scam - debt consolidation programs. Their sales people will contact you and say that they can knock 40% of your debt out, simple as that. Sounds good, right? Too good. Here's how it works: You stop paying your bills.
Whoa! Won't that trigger late fees and collection notices? Yup. Absolutely. But here's the beauty of it - instead of sending money to the credit card companies, you send it to basically an escrow account for the debt consolidation company. After a few months of harassing calls, the debt consolidation rep calls one of the card companies and says, "Hey, this chick can't pay her bills, and here is what you're going to need to do to get any of your money - knock down her rate, stop the late fees, and accept this lump sum that equals maybe half of the outstanding debt. We'll call it even, you write off the rest. Sound like a deal? Great."
You do this over and over until your debt is gone.
What's wrong with this arrangement? Several things.
1. If you have the money to pay your debt, you're going to be holding it in escrow for months while your credit rating plummets instead of just sending in the payments. The debt consolidation people will tell you that it's better than filing bankruptcy, but won't tell you exactly why. Ask, you'll see - no good answers.
2. If you really don't have the money to pay off your credit cards and are already late, you don't need these clowns. Make the call yourself and negotiate a rate reduction, balance reduction, whatever. Credit card companies know they're going to have losses - that's why they give people cards with rates in the 20-30% range. Those rates imply a huge amount of risk and are worse than junk bonds to the credit card company. They'll work with you.
3. The fees you'll pay to the debt consolidation companies are outrageous, and they take it out of the money you set aside to pay your bills, which reduces how much you can pay off. If you have debilitating debt, a bankruptcy attorney will probably cost you less than these guys will. Do a Google search in your area for flat rate bankruptcy filing services, do your due diligence to find someone who will work with you, and file. It's really a toss-up as to whether bankruptcy is any better or worse for your credit rating than these debt consolidation companies.
4. It's unethical to not pay your bills. You did the spending, now it's time for you to pay up. If you have the money to send to the debt consolidation people then you have the money to send to your credit card company, plain and simple.
I know that I often come out sounding somewhat harsh when it comes to debt, but the reality of the situation is that for the vast majority of those in really stressful debt situations, the fault lies firmly with the debtor. If you are a sucker for advertisements that make you feel like you "deserve" to buy this or that or if you feel like you need to keep up with the Joneses (they're in debt too), you need to get honest with yourself. Tighten your belt, stop eating out, ditch the cable, learn how to cook, shop at consignment stores, join Freecycle, and generally just get over it. I know times are tough right now - health insurance is expensive, jobs are scarce, but we (as a society) are drowning in a sea of entitlement.
I'm not without guilt here - I have debt from some stupid situations and am working my way out of it too. I just hate seeing people fall for predatory companies that pretend to offer assistance but really just make your situation even worse.
If it sounds too good to be true, it is.