DEBT CONSOLIDATION COMPANIES

These are personal comments about debt counseling companies. They are based on my conversations with people who have come to me. who have attempted to use them. All to often they have been disappointed.  For purposes of these article I will refer to Debt Consolidation Companies as "Companies."

There are legitmate debt consolidation companies.  They make their money when you send them your money.  They are suppose to make their money by sending your money to your creditors.  Also they attempt to "strike a deal" with each of your creditors, so that the creditor will drop interest or decrease the interest rate.

THE ACID TEST OF ANY DEBT CONSOLIDATION COMPANY, IN MY OPINION, IS HOW IT PAYS ITSELF. IF IT PAYS ITS SELF A PERCENTAGE OF THE MONEY YOU SEND IT OVER THE LIFE OF THE PLAN, IT WILL PROBABLY BE A REPUTABLE COMPANY. FOR INSTANCE, YOU PAY IT $100.00.  IT KEEPS $8.00 FOR ITS FEE. IT PAYS THE REST TO YOUR CREDITORS.  BUT ALL TO OFTEN COMPANIES PAY THEIR FEE IN FULL UP FRONT.  FOR INSTANCE YOU PAY IT $100.00.  IT KEEPS THE FULL $100.00 AND PAYS NONE TO YOUR CREDITORS.  IT CONTINUES TO KEEP YOUR MONTHLY PAYMENTS AND SEND NONE TO CREDITORS UNTIL YOU HAVE PAID IT ITS TOTAL FEE. 

A typical service will say, "Don't pay your debts. Send us a certain sum of money. We will make an agreement with your creditors. You will settle your debts for a percentage or pennies on the dollar." I am skeptical of most of these Debt Counseling Services for they are thieves, who take advantage of the legitimate fears of consumers who are heavily in debt. Honest ones exist.

The KEY that minimally separates out an honest one from the thieves is the manner in which the debt counselor is paid. IF HE PAYS HIMSELF FIRST, HE IS A THIEF. By that I mean the following:

a. Assume you agree to send him $500.00 a month for 30 months for a total of $15,000.00;

b. Of course, a debt counselor will rightfully expect you to pay him for his services;

c. He thus says and you agree that he will charge you 10% or $1,500.00 for his services;

d. HERE IS THE KEY: If your agreement is that he receives his $1,500.00 up front, that is from he pays himself the first three payments, then I consider him a thief. If instead he pays him self the 10% fee at $50.00 a month, that is as a percentage on the amount of money that he administers, this debt counselor will, passes my first test of honesty.

Under a banking regulation, banks and other financial companies have to charge off a debt if it has received no payment on it for 90 days. A charge off is when the bank has to subtract the amount of the debt for its profits. Once charged off, banks typically send the debt to a collection agency for collection. Thus the first three months of payment to the Debt Counselor consumes the 90 days to charge off. It has its fee. The collection agency then contacts you. You do not have the money for you have sent it to the debt counselor. The result is that there is a very reasonable chance that you will be sued for the money.

Last, a reputable credit counseling agency will not ask to deduct the money from your bank account.