Debt "Consolidation": Scam, Scum or Sweet?
Throughout the last couple of years, I’ve had some bad decisions. I decided to start using my credit to work for me, and to buy things which I couldn’t afford. Partly this was because I had a horrible ex, who I thought I should do things for, and partly because of just living outside of my means for a certain period of time.
The long and short of it is, I’ve gotten myself into a bit of credit card debt. I’m not in any big trouble, just needing to pay it down so that I can get on with using that money for other things. There is a couple of web applications that I have in the works which will help me remind myself, but that’s neither here nor there at this point. So, I have all of this credit at high interest rates, surely there is someone out there that will look at my credit and finance it at a lower rate, make some money off of me, right? I’m thinking that what I need is a consolidation loan - something to lump together my credit card debt and give me one monthly payment. What I call this, is debt consolidation.
Thinking we are in the age of the internet, I type “debt consolidation” into google and give it a try. This is my first mistake. Apparently “debt consolidation” doesn’t mean that you are consolidating your debt, it instead means that you are going into what I would call debt negotiation. This means you decide of your own volition that you are going to stop paying your bills, and try to negotiate with the credit card companies to pay off your debt at a fraction of your actual debt. But I don’t know this, so I nievely fill out a couple of forms at “debt consolidation” sites. This gets pretty long, so I put in a break. Read on, MacDuff.
The first people who got in contact with me were some people from Credit Solutions. Let me be clear on this: I’m not making broad generalizations about the company here - I can only speak of my own experiences. The person who I got on the phone went through a whole spiel, “explaining” how it works. He was very high-pressure and very fast talking, just from the start I didn’t want to buy anything from him because he seemed like a used car salesman who decided that it was better to make money from nothing than from goods.
Here’s the explanation he gave me: You’ve probably been paying your cards down already, so you’ve paid 70-100% of the cost of your original loan. You stopped paying your cards, wait 3 months, and then they start negotiating with their “powerhouse lawyers”. Then they negotiate you to pay your debt at 40-60% of the current balance, and the credit card companies get to take the remaining 40% as a tax loss.
Now is when the math gets strange. The man on the phone attempted to say that this meant that the credit card company got 140% of the current balance. This doesn’t make sense to me, especially because I’m a smart credit card consumer, and most of my debt is on 0% APR promotional rate cards. This means that they have made at most 3% of the balance from me, based on balance transfer fees. The man on the phone tried to dance around the issue, saying that they actually will get the 40% tax loss and that means they’ll still get 140%. 140%? This doesn’t make sense - 60% plus 40% is 100%, not 140%. Lets add to this that a tax loss is not the same as profit: a tax loss only gets you like, 30% of your loss.
At this point, I’ve decided that I’m being taken for a ride already, but I ask how it works anyway. Here’s how this particular company is setup: I pay into a savings account (of my own), automatically deposit around $200 a month, and they take money out. For the first three months, they take the WHOLE amount. After that, they take half the amount, and leave the other half. They then start negotiating with your creditors, and when they make a deal, they tell you “pay them now”. In the end, they take 15% of the settled cost of your debt. On $6k settled debt, this is another $900.
I really didn’t want to do it now, mostly because of the high cost. The man kept coming back to my objections with “you can’t borrow your way out of debt”. Of course you can’t borrow your way out of debt. That’s stupid. I wasn’t planning on borrowing money and then ending up with less debt. I was planning on borrowing money so that I’m not paying so much in order to have the debt. Apparently he thought I was an idiot, because he kept repeating it to me.
He sent me a little packet of stuff, which laid out the whole plan. After that, he gave me a call back. This is when I got really defensive. I asked him point blank: “What is the worst thing that can happen to me if I go with this plan?” His answer: “You stop paying your bills.” On the surface, this is true. The worst thing that can happen is that I stop paying my credit card bills. He neglected to mention the fact that ceasing payment on my credit cards would ruin my credit, cause insane fees for lateness, and possibly send me to forced arbitration with the creditors. Every creditor that I have ever had since 2002 has had an arbitration agreement, which basically would end up in garnishment of wages.
About a week after my first bad experience with a debt “consolidation” company, I got a second call from a completely separate company. They introduced themselves on the phone as “Christian Financial Services” or some such. Basically the same deal, but this was a low-pressure sell instead of a high-pressure sell. He was much more reasonable, and talked me through the whole thing at my own pace, taking his time to lay everything out that I could understand it. It was basically the same deal, 15% and they negotiate for you, but they set up an escrow account instead of you doing it yourself.
When I asked the same “worst situation” question, he gave me a realistic outlook, and this company is in a much better standing. If the creditors don’t like their negotiation and take you to arbitration, you actually get representation from their company to help you out. I was almost willing to do it.
Then I went and looked at their actual company online, and discovered that they are a chamelon of some sorts. They were originally called something similar to “USA Debt Consolidation” or something otherwise patriotic. Apparently they decided that God could be on their side, at least it’s good advertising. What good company has to change their name to get religion on their side? A good company would not need to change it’s name.
Some people have gone with these companies, and they have actually negotiated with the creditors in order to pay off your debt at a fraction of the price. If it happens, that’s the sweet part of this. Just given an example of $10,000 credit card debt, it is possible to pay around $6,000 and have all of your debt paid off. It’s basically saying that you can spend money that you won’t have to pay back, ever. There is some hit to your credit rating in the short term, but in the long term, it starts going the other direction. The hard part is finding a company who will do this and who you like.
I had an even harder hurdle to surmount - I don’t really believe that it is ethical to do this. I spent the money, I should pay it back - that’s the deal I made with the company when I signed up for the card. To me, I need to go through with paying them back. Luckily, I came into this with a decent credit rating, and will probably go out with a similarly decent one. Right now, I am a prime target for anyone who wants to give me a large loan at a decent rate - if I can pay less for the money I spent, I’m savvy enough to do it.
There is one other option which I looked into, and will represent the only company that I will link through this diatribe: Consumer Credit Counseling Services or Money Management International are truly non-profit and have good word-of-mouth from anyone I have talked to. They will not negotiate to settle your debt, but they will work with the creditors to get lower percentage, and help you through your budget. The couple of talks on the phone that I had with these people were very productive, and I got some stuff in the mail to help me out. You pay down the entirety of your debt. The downside is that you get a good size hit on your credit rating.
In my position, I decided that I was on a good track myself already - I’m paying off my cards smartly, taking the highest APR out as quickly as possible. On my current plan, I will be completely debt-free in 3 years, less if I get some windfall of any sort. One of the bonuses of having a good credit rating is that people are willing to loan me money at promotional rates for some amounts of time. When my promos run out, I play financial musical chairs and get the lowest rate on all of my money. That’s just for me though, to each his own.
The most important part in all of this is that I got control of my budget, and started living within my means. My punishment for living outside of my means for so much time is that now I have to live well within my means. I have to live within the means set upon by having to pay a large chunk of each paycheck to the creditors. Once I’m outside this, it will be much easier for me to have lots of happiness and savings.