debt consolidation program - Understanding debt consolidation program

Understanding debt consolidation program

In this article we will discuss:

Preliminary material to give credit where credit is due and clarify the difference between consolidation loan and programs;

The truth about misleading debt counseling ads;

Tasks a good counselor should be doing but usually does not;

Debt arbitration or settlement;

Checklist for counseling quality;

PRELIMINARIES - Much of the information in the former article and in this article are directly from Jim Young, CEO Accelerated Debt Consolidation...

a debt counseling group I have come to know and trust. Additional material in this article and the former has been gleaned from two other groups I have come to know and trust namely National Foundation For Consumer Credit (commonly referred to as Consumer Credit Counseling Service [CCCS]) and MyVesta.org. However I must state the majority of quotes in this article are from Jim Young including a most notable Beware Page which states among other things: "Many consumers are AFRAID to get involved with debt consolidation companies these days because there have been so many people that have been victimized by BAD DEBT CONSOLIDATION companies." Jim's caution page offers sound advice to avoid being a victim.

Additional preliminary comments should include the difference between a debt consolidation loan and a debt consolidation program. A consolidation loan (see Balance Transfer and Consolidation) can be bad or good depending on how you obtain it and use it. It usually consists of taking out a loan to pay off smaller debts. A consolidation program is exactly that... a program designed to help the consumer reduce the interest rates on their unsecured debt obligations so that they can pay off what they owe over a shorter time period, without having to borrow money to do so and without creating additional credit problems. The problem is knowing who are the good guys and who are the bad guys in helping the consumer.

LOWER YOUR PAYMENT BY 50% - You've seen the adds. At one web site I will not name, I found a less blatant though very common misconception that catches so many consumers and leaves them victims: "Because most major creditors have hardship programs in place which allow for reduced payments and lower interest, and generally have a financial relationship with these agencies, your creditors generally prefer these types of programs." The truth is hardship program is almost non-existent and payment reduction no longer exists. Often reduced payments come in the disguised form of debt settlement which will be discussed later in this article. But REDUCED PAYMENT DOES NOT EXIST with very few exceptions.

Not long ago a Federal Committee was formed that asked all of the major credit card issuing banks to set up minimums and interest reductions so the clients would be paid off in a minimum of 5 years. At Payoff Calculator you can see the result of that request and see what the interest rate and required minimum payment must be to payoff as requested by the committee. That table is now the guideline used by debt reduction programs whether through a non-profit or a for-profit organizations... it makes no difference.

The only major difference between a non-profit and a for-profit group today is the for-profit firms will not receive "Fair Share" or share in monies paid to the credit agency by the debtor. This use to be the primary means of support by non-profit groups. But the Fair Share percentages have dropped to such a low amount that it barely even makes a difference anymore. The consumer will be given the same minimum monthly payment and interest reduction whether they use a for profit or a non profit.

What a good counselor should be doing for the client

Fees for services should be reasonable. Less than ethical agencies will charge up front the first month's payment on all bills including bills that should not be included (student loans, etc. See my article Sifting Through the Debt Management Industry ). Often times the consumer is told it will be returned upon completion of the program. Do not buy into this. Fees should be a very nominal flat fee per month or a small amount for each debt taken on by the counseling agency. It should be noted that you should check with the agency as to whether you may be selective in which debts are handled by the agency.

ISSUES PREVIOUSLY IGNORED - There are key issues a good counselor should be doing for the client. My earlier article in 2000, short changed two rather important ones because back then there was a difference between for-profit and non-profit.

One issue was actually not referenced and the other less emphasized than perhaps should have been the case.

Closing of Accounts - If the client is concerned about his credit rating and is intending on completing the program it is extremely important that he/she use a firm that specializes in minimizing any damage to the credit as a result of consolidation. (I believe Accelerated Debt Consolidation is such a company). This involves such things as proper closing of accounts before the consolidation begins and only including accounts that will offer a better interest rate and that the client wants included. Changing due dates and making sure all proposals are sent, followed up on, and accepted in a timely manner is a specialized service that some less favorable agencies should but do not do. Clients that need to be able to keep some credit cards for business and travel would also be better served by a firm that specializes in consumer choices. Many non profits will still require the clients to include all accounts in the consolidation.

Follow-up - Many non profit credit counselors only disburse payments twice per month, usually on the 1st and the 15th. This is the old fashioned way of doing it and you should check to see how often checks are disbursed (daily is preferred) for the following reason:

A few years ago creditors no longer allowed the credit counseling agency to pick monthly payment dates. Creditors required the client to do so. But if not changed and a client has (for example) 10 accounts with different payment dates and the agency begins making one payment to the agency for all 10 accounts, payment becomes late on some. This is part of the reason why many agencies required the client to be delinquent on their accounts when they came into the program. On the other hand, the only way to make this run smoothly is to change the payment dates before the client gets started in the program and/or disburse payments daily.

Also, there is still the issues of preparation before the consolidation begins and the intense follow up on proposals after the client has started the program. Tragically, creditors lose about 30% of the proposals that they receive. For example, Citibank receives 5000 proposals per day and MBNA receives up to 50,000 proposals per week. If they are not followed up on by phone, perhaps 30% of them will never be accepted because they are lost.

According to Jim Young, "I can tell you from 6 years of experience that this business requires ongoing servicing for as long as the clients are in the program. For clients that stay in the program, the time comes when they start paying off smaller accounts after let's say 2 years. Those accounts have to be removed from the program and the funds that were being disbursed to the paid in full accounts, need to be applied to remaining accounts. I could go on and on with examples of the continuing service requirements but it all boils down to properly servicing clients."

Debt Settlement, Negotiation, and Arbitration

There are many pro and con opinions concerning this subject. MyVest.org, whom I highly respect, believes settlement is one of the strongest consumer options available. I also asked the respected National Foundation for Consumer Credit (NFCC) which is the umbrella company for CCCS. Unfortunately NFCC never offered a response. Therefore each consumer should develop there own opinion on this subject which is based upon their own thought process and not the opinions of others. That being said, I offer the following.

Though most of this section was offered by Jim Young, I must state how emphatically I agree with most of his material and conclusions.

"I will start this compilation of info with the truth about debt negotiation/settlement plans. First of all there is no such thing as a 'legitimate' debt negotiation service and as a matter of fact, it makes no sense at all for a credit consumer to get involved with a negotiation service at all.

Before any account is eligible for a Settlement, it has to be charged off which means at that point the consumer already has an R-9 on the credit report and the damage is already done. At that point, even if the account is paid in full the R-9 still remains there for 7 years. What this means is that after an account is listed as an R-9 there is really no good reason to pay it at all because again, THE DAMAGE IS ALREADY DONE.

"Now lets compare 2 scenarios, one where a consumer lets the accounts charge off and does not pay them at all and the second being a consumer that decides to use a debt negotiation service. Consumer number 1 can't pay his accounts anymore due to illness, layoff etc. so he just stops paying them. The accounts get charged off, he gets the R-9's and the collectors are harassing him. If he knows his rights under Federal Law he can easily stop the collection calls. If he does nothing at all, in 7 years all of this will still come off his credit report. Now lets look at consumer number 2. He decides after 2 years to hire a negotiation service. This consumer had 2 of the 7 years under his belt since the charge off with 5 years to go. He goes into the program and starts making payments to the negotiation firm of which they usually pocket about 33% of and put the remainder in an escrow account until they build up enough funds to start negotiating settlements one account at a time.

"Now keep in mind that this consumer already had 2 of the 5 years under his belt before the R-9's would come off his credit report. The negotiation firm goes in and settles a $10,000 account for $5000. This consumer will get a 1099 for the $5000 which now becomes income, he will be taxed on the $5000, the R-9 will remain on his credit report now for 7 years from the settlement date and the collection agency that settled the account would have done the same thing directly with the consumer so he could have done this himself without paying one third of his monthly payments to the firm. So he just tacked on 2 years of additional time that the R-9 will remain on his credit, his credit is still ruined, he has paid thousands of additional dollars in fees for what he could have done himself, he has been taxed on it and he has accomplished ABSOLUTELY NOTHING.

"These firms are not only doing this with consumers that have charged off accounts, they are doing most of their business with consumers that are current on their bills and really need a credit counseling program.... The only time a settlement makes any sense at all is in a case where a consumer has pretty good credit but has an old charged off account on his credit report and is trying to obtain a mortgage, for example. The mortgage company says that if they can show the old charged off account as 'satisfied' or 'settled' they will then approve them for a mortgage.... For consumers with high balance, high interest debt there is still only one way to maintain their credit and that is to PAY THE ACCOUNTS IN FULL. The only way to pay the accounts in full in a reasonable period of time is through a quality DEBT MANAGEMENT Program."

CHECKLIST FOR CREDIT COUNSELING QUALITY

Besides the Warning Page listed at the beginning of this article, here are a few great tips from Jim Young when choosing a credit counselor. The following list also offers a great summary to this article's content:

Does the firm advertise "lower your monthly payment"? If they do something is wrong because monthly payments are not lowered through credit counseling... interest rates are.

Does the firm have NON PROFIT plastered all over their advertisements? If they do they are trying to make you think that you are going to get a better deal because they are non profit. Not true, you will get the same monthly payment and interest reductions whether the firm is non profit or not. Does the firm offer debt settlement? Firms that offer debt settlement as a "plan B" often are doing so to be able to still make money off of you if you can't afford the debt management payment. Recall from the article that there is really no benefit to a debt settlement agency... the client can do that themselves without paying for it.

Does the firm charge monthly fees that are based on a cost per account and which accounts are included? Is there any selectivity in which accounts you want the agency to handle? Flat fees should range from $29 to $69 per month based on how many creditors being handled.

Did the counselor ask for each individual interest rate on each account? Many firms don't even look at what the existing interest rates are and could advise you to include an account that would result in a higher interest rate through credit counseling.

Did the firm require account numbers before giving you a quote? Account numbers are not necessary to give a client a quote. All that is needed to provide an accurate quote are the names of the creditors, the balances and the interest rates.

Is the firm going to accept you as a client even though your accounts are beyond 6 months behind and already charged off? If this is the case you are being misled because when accounts are 6 months behind and charged off the credit counseling agency can no longer get proposals accepted through the creditors debt management departments.

If after you tell the firm that you can't afford the payment, do they offer to perform a "complete analysis" for a fee or recommend debt settlement? If so, this program is probably not right for you and this agency is clearly the wrong one.

Did the firm tell you that you have to include all credit cards and that you can't keep one for business and travel? The only time you may have to include an account that you didn't want to is if it is with one of the same banks that you have included an account with. For example, you can't consolidate one Citibank account and keep another Citibank account.

Your counselor should be able to tell you the exact payoff time on each and every account individually with the exception of MBNA and Discover accounts. MBNA and Discover are the only 2 creditors that don't have one set interest rate that they offer for credit counseling until after the proposal is sent and accepted. If the counselor gives you an answer about your payoff time as "5 years" or "48 months" he doesn't know what he is talking about. With multiple accounts the payoff times will vary between accounts because they will have different interest rates.

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