Watch Out for Scams by Credit Counseling and Debt Management Companies

Don’t need a calculator to see Debt Consolidation Scams!

Want to know a secret? I’m terrible at math. I need a calculator for even the most rudimentary of math problems, but I do know one math statistic without using a calculator:  100% of people who visit with me after going through so-called consumer credit counseling service, debt reduction plans, debt consolidation, or debt management plans were ripped off and their credit severely damaged. They would have been better off filing for a Chapter 13 Bankruptcy from the start with a qualified bankruptcy and consumer protection attorney.

Here’s how these scams usually work:

Sam owes $30,000.00 on 8 different credit cards and he can no longer keep up with the monthly minimum payments. He contacts a credit counseling service or debt consolidation company who reviews his finances with him and determines a plan of action. This plan will be one of two types depending on what kind of service the individual company provides.

1) The credit counseling service tells Sam that he needs to pay them $500.00 a month. They take a percentage (somewhere between 5-15%) of that $500 each month and then pays the remainder to either the lowest single debt owed or divides the amount in some way to all creditors. You should note now that some of Sam’s creditors are either not getting paid or not even being paid the minimum payment. Sam’s credit is harmed in the process and the creditors will begin calling Sam about not paying.

2) The debt consolidation company tells Sam that he needs to pay them $500.00 a month. They keep each month’s payment for anywhere between 9-18 months. This is their fee. Meanwhile, Sam’s creditors are not getting paid and they begin to start calling him. They don’t care that Sam has hired a debt management company to take care of this, he is the one that owes the debt. After the debt consolidation company has collected their fee, they begin to stockpile Sam’s cash until they believe they can settle a debt with a creditor for a lower amount than Sam owes. Once again, Sam’s credit is damaged by the settlement and lack of past payments.

So this is how these scams work. Let me first say these programs are not bad programs and I often advise potential clients who have manageable debt to try them, but that’s the key. They could do the programs without having to spend money doing it. These companies sit back and collect your money for something you could have done for free. The credit counseling and debt consolidation companies are usually no better than anyone else in working out a payment plan or negotiating the settlement of a debt.

Legitimate Credit Counseling Service and Debt Consolidation Companies?

If one would rather not try these programs on their own and would like to hire one, there are some legitimate companies somewhere. I don’t hear much about them because, like I mentioned above, I usually only hear about the scams. A resource to check legitimacy of a credit counseling service or debt consolidation company is through the local Better Business Bureau. The Federal Trade Commission has put together a good synopsis in how to choose a credit counselor or debt management company.

How the Ponzi-Scheme Falls…

And then it comes to the point when the cards fall. Sam’s paying the $500.00 he is contractually obligated to pay to the credit counseling service or debt consolidation company and then he is sued by a creditor for non-payment. The judge doesn’t care Sam hired a credit counseling service, he legitimately owes the debt and orders Sam’s wages to be garnished. So now Sam’s employer is sending 15% or 25% of his take home pay (in Nebraska) to the court to pay the creditor that sued Sam while he is still obligated to pay the credit counseling service or debt consolidation company $500.00 (he remains contractually obligated in most circumstances).

This entire situation would have been less painful to Sam’s credit and wallet if he would have consulted an attorney about a chapter 13 bankruptcy. In this situation, the attorney would have determined Sam’s disposable income and determined a manageable repayment plan that would not have damaged Sam’s credit any where near what the credit counseling or debt consolidation companies did.

Schedule your free consultation online or try our free online bankruptcy analysis to determine whether you would be a candidate for bankruptcy and what Caldwell Law can do for you.