If you’re drowning in debts, then those online ads offering to help reduce your debt might seem tempting (even if they are endorsed with the phrase “As Seen On Today Tonight”). The basics of debt consolidation are fairly obvious: plan a proper budget, cut unnecessary expenses, try and convert high-interest options like credit cards into lower-cost alternatives, seek reductions in payment from major debtors. In more extreme cases, you can negotiate a debt agreement (which reduces payments but generally has no flexibility if there’s further hardship), or decide to enter bankruptcy.
However, many people don’t want to grapple with the details, or face the prospect of ringing up all their creditors and asking for deferred or reduced payments. Debt relief companies offer to handle all those aspects and come up with a repayment plan. (That plan will include their fees for setting up the agreement, either up front or as part of the ongoing repayments.)
Though that might sound tempting, the results of a “shadow shop” by Choice suggest that this isn’t an option that should be pursued by most people. Two researchers from the magazine called 11 debt relief companies, posing as two individuals with serious debt (and with no prospect of using their mortgage as a means of negotiating new deals). In the vast majority of cases, the services suggested coming up with a debt agreement.
However, an independent financial counsellor suggested that a debt agreement was not the best solution in either case. For one scenario (largely involving credit card debt), renegotiation was much less risky. For the other, bankruptcy looked like a more effective option.
Given that most of the consultations took less than 20 minutes and that relief companies stand to make more money by offering a standardised service, these aren’t surprising results. Nonetheless, they confirm that getting out of debt is (inevitably) a lot harder than getting into it.
Choice advises seeking a meeting with an independent financial counsellor before considering a debt relief service. Its recent debt relief article offers useful links to financial counsellor services in each state, as well as a handy budget planner and an in-depth walkthrough of the legal alternatives if you’re really drowning in debt. (Note that most Choice material is subscriber only, as the magazine declines to accept any advertising.)
Debt Relief [Choice]
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