Debt Consolidation Plans
Also called Credit Counselor programs, Bill Paying Services, Budget Service Company programs, Consolidation Programs, Reduced Interest Payment Programs, One Pay, or Debt Management Company Plans)
Some debt management company plans are not consolidation loans, they call their product a “consolidation plan” or “bill paying service”. They are simply bill paying companies that restructure your debt instead of adding to it with a consolidation loan. The distinction is subtle, but consolidation plans are not loans, they don’t lend you any money, you are not taking on any new debt, you just send the monthly payment to them and they pay all your creditors.
With a consolidation plan, the company works as a liaison between you and your creditors, and negotiates with them to reduce or eliminate your interest and late fees, and they are usually successful at getting all the credit cards to drop the interest to 0. This allows the debt to be paid off much sooner, since you are only paying off principal and no interest.
Once you enroll in the program, your creditors going forward are forbidden to contact you. They can only contact your debt manager and not you. You send the bill paying company one monthly payment, and they in turn payoff all your creditors a little bit at a time. Usually when the smallest creditor is paid off, more cash is available to be applied to the remaining creditors, paying off those balances even more rapidly.
All the companies require your payment in money order form only to guarantee that you’ll never bounce a check, because they just forward the funds to your creditors. If they allowed you to mail in a check and it bounced, you might anger some of the creditors into kicking you out of the program, then you’re in trouble, because you interest shoots back up to 18% or whatever it was before.
There’s Profit, and Non-Profit Companies
Some of the “for profit” companies charge between 1 – 5% of your monthly payment as a service fee. The “for profit” companies usually have up front fees before they’ll even take you on as a client. Sometimes the fee is refundable after 30 days if you decide not to enroll, sometimes you’ll lose the fee, and sometimes it’s refunded at the end of the program, usually 48 months.
In Indiana a “Budget Service Company” may charge up to 15% of the total amount the debtor agrees to pay through the licensee divided into equal monthly payments over the term of the contract. There is a maximum initial payment of $50 which is deducted from the total contract fees. If you quit the program before it’s over (very foolish), all fees are non refundable.
The non-profit organizations only charge a small monthly fee or less to cover administrative costs. Many of your fees may be optional with non-profit organizations, because many costs are paid by pools from all the creditors, as well as other resources. Sometimes you only have to pay them if you can afford to. Usually it will cost you less to deal with the non-profit organizations than with the “for profit” companies.
Naturally, the “for profit” companies will try to talk you out of dealing with the non-profit organizations, scaring you with tactics like pointing out the fact that most of your fees with non-profit companies are paid by the creditors. Because of this, the “for profit” companies claim that the non-profit organizations are not acting in your best interest. However, you will still end up paying less. How can that not be in your best interest? Your up front fees with non-profit organizations are either cheaper or non existent, and your monthly payments may be lower also because they have lower per month fees.
Both types of companies whether they are “for profit” or not, all arrive at the same goal for you: getting your creditors to drop your interest to zero so you can just payoff the principle. It’s not the balance you owe that’s killing you, it’s the interest. Debt consolidation companies have agreements setup with over 3000 creditors, and are more influential with them than you are. You may not be able to convince all your creditors to reduce the interest rate on your own . Most creditors are willing to drop the interest rate, and late fees because it usually means they’ll recover their investment in you instead of writing off a loss, or wasting more money on collection agencies to hound you.
But usually one of the requirements of reducing the interest is that you must close all the accounts that you are consolidating. You are usually required to send your payments to the debt management company in cashier’s check or money order. Some organizations can also do electronic funds transfer. Never send cash, it’s not traceable. With all the accounts the debt management companies maintain, it’s hard to verify that all our checks are good, so they all want money orders.
WARNING: It may appear on your credit report that you are working with a credit counselor or debt management company. No company can tell you this won’t happen. It’s up to the individual creditors to decide whether the information should appear in your credit report. No matter what your debt manager tells you, they have no control over this.
Some IRS approved non-profit companies don’t require any money up front from you. They are much better than most payment plans, because you can check your current balances anytime by logging into their website. They are paid by the creditors in the program, and also receive money from any books and downloads you might choose to buy from their website, and by the optional donation you pay them when you sign up (usually $60). That’s a lot cheaper than the $300 that the profit oriented “bill payment” companies demand up front.
Up Front Fees:
Handling the up front fee is tricky. Some non-profit organizations usually allow you to enroll without paying this fee. But the profitable companies will ask you to send them a money order for $300 or more before they even take you in as a client. This is because they need to get all your account statements and balances and contact information to check with all your creditors to see who will drop the interest to 0%, and who will participate in the program at all. Car loans and home loans are out.
This preliminary work takes time and resources on your debt consolidation company’s part, so they want a some compensation up front. However, some of them are quite lacking about disclosing to you IN WRITING their complete user agreement until you have sent them your money. This is completely unfair and insulting to you and you should not sign up unless they have sent you at least the verbiage of what their final agreement is. Non-profit organizations usually have their agreement contracts online for you to read before you send them one penny. We’re not talking just marketing sales info, look for the actual legal agreement, which is usually found at the end of the enrollment page before you submit.
The reason you want to read this agreement first is maybe there is something there that you disagree with and would not sign. But some of the profit companies take your money order first, then send you a proposal with the final agreement. Then you see something you don’t like on the contract, the company begins to give you a bad feeling, and you want out. But you might lose your fee even though the salesman may have told you your up front fee is refundable, he did not tell you it’s only refundable at the end of the program 48 months later. Quit now and you forfeit your deposit. This is why it’s so important to get everything in writing before you enroll.
About Your Monthly Payment Quote: The Catch 22
When you first contact these companies to determine what your monthly payment will be, they can only estimate how much you’ll actually be paying, because they do not accurately know all your balances. You may think you know your balances, but when you send in your statements, they discover your balances are more than you told them, and that will jack up your payment from their original quote.
You have to send them your latest bill from each creditor, then they have to call them up and see who will participate in the program, and who will not, then once they have heard back from all your creditors, they can add it all up and tell you what your monthly payments will be. This is sort of a catch 22 for you because you don’t know if you want to enroll with this company, yet they can’t get you started without a deposit, so you have to send money to a company that you might not want to sign with. This is why we recommend the non profit organizations, because they either charge a small fee to get started, which is way cheaper, or sometimes no fee at all.
NEVER agree to enroll in the program until you have seen a contract specifically detailing YOUR entire consolidation program, including a listing of all the accounts and balances in the program, the interest if any, what your monthly payment will be, HOW MANY MONTHS, and any other little fees that they sneak past you. Any reputable company should give you your deposit back within 30 days if you don’t enroll. At the very least you should get some of it back. If you do not a written agreement, DO NOT SEND THEM MONEY! Assume every penny you send them is completely non-refundable. You need to know what accounts they are claiming will be paid under this program. If they don’t itemize this, don’t sign up.
TIP: When you itemize all the accounts you want to be included in the plan, make sure you have all your ducks in a row and give them all the information they need in one shot. Don’t go back to them after they went through all the trouble of determining your monthly payment and add another account to the pile. They’ll have to start over, that will increase your payments, accusations will fly, and it just becomes a big pain in the neck for everyone. Do your homework first, and send the consolidation company one packet containing everything they need to get started. Don’t spoon feed them information, as time is of the essence.
Some debt consolidators have clauses written into their contracts that say “You agree to hold us harmless….and you will not file any lawsuit against us”. DO NOT sign the contract if this clause is present. This means they can stop paying your creditors, you get in big trouble, and you can’t sue them for it. Just move on to the next company that does not have this clause. But this clause is OK if it is qualified with the statement “unless we are negligent or commit a crime…” Then it means you can sue them doing you wrong.
Do not sign their contract unless you agree with everything in it.
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