Make Debt 'Relief' Your Last Resort

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Should you trust a debt relief company? That’s what we’re looking at this week.

Watch Out

While it’s hard to know for sure with the limited information you’ve sent, given that 42 payments of $160 is nowhere near $15,000 (it’s less than half of that, in fact) it sounds like what you’re talking about is debt settlement, not simply debt consolidation. Either way, you need to be careful about what you’re getting into.

NerdWallet sums up debt settlement like so: “Consumer finance groups warn in very strong terms that it’s risky, doesn’t work for many people and may just prolong your financial pain. It won’t stop late fees, collection notices or even threats of being sued while settlement negotiations play out.” And that could take years.

Here’s why. Debt settlement companies will divert your monthly payments from the creditor (say, your credit card company) to a separate savings account, and then use that to negotiate with the creditor once it hits a reasonable amount, per NerdWallet, because “settlement offers work only if it seems you won’t pay at all, so you stop making payments on your debts.”

That means you’ll rack up late fees, penalties and delinquencies. And there’s no guarantee that the debt relief company will actually be able to negotiate a lower payment on your behalf, leaving you, well, screwed and potentially even more in debt than before.

As mentioned above, creditors aren’t just going to agree to let you repay half of what you owe and go merrily on their way. You always need to think of what the company offering you the payment scheme is getting out of it — it’s certainly not doing it out of the goodness of its heart. As with all financial products, “if it sounds too good to be true, it probably is,” says Ted Rossman, chief industry analyst at CreditCards.com.

“The reader is ultimately asking if she should be concerned about the credit score impacts of the accounts being automatically closed once the debt is retired,” says Rossman. “I’d suggest that isn’t the best question to be asking, because it’s fast-forwarding to the end, and it’s a long road.” Rather, think about the credit ramifications you’re experiencing now or in the near-term if your habits don’t change.

There are better options to try before you turn to a potentially scammy debt relief organisation (and many of them are just that — scams).

Other Options

“I think the reader should be more concerned about the large amount that is owed and figuring out the best way to attack that,” says Rossman. “I’d advise this person to get a detailed opinion from a non-profit credit counselling agency such as Money Management International.”

If your biggest issue is making payments on time, contact your creditors directly to see if you can work something out. Be sure to get the agent’s name and telephone number with extension, etc., and take notes on your conversation. Then ask them if there’s a way to adjust your payments, schedule or interest rate (not necessarily settle for less money than you currently owe).

Sum up the situation. Explain that your financial picture has changed, but you still want to honour your commitment. Either ask what the collector or creditor can offer, or propose your own plan. You may hear yes, no or be referred to another department.

You want to get to a place where you can make affordable payments on time. Get an agreement in writing.

Debt consolidation is similarly flawed. While I can’t say for sure because I don’t have all the pertinent information, just know that your quoted interest rate could change and you might not actually get away with paying less (in fact, you could end up paying more in the long run).

To summarize: Be suspicious of any company promising to settle your debt for you. Look up the company with ACCC to see the legitimacy of the company, or use the ACCC to find some recommended consumer protection agencies.


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