Friday, June 25, 2010
Know the truth about debt settlement companies
Most debt consolidation companies claim to be nonprofit, but they make a lot of revenue at the expense of their customers. These companies charge customers in several different ways. Some charge a percentage of the payments made to the lenders. Some keep the first one or two payments for "administration costs," which can cause the customer to be considered delinquent from the creditors' standpoint.
An Everyday Example
Let's look at an example of debt consolidation. Let's say you're facing $20,000 in credit card debt. You turn to a debt consolidation company, attracted by its nonprofit status. You are stunned when they pocket your entire first payment as a "voluntary contribution." You're also surprised to learn that the company is collecting nearly 10% of your payments as "continuing contributions." Of course this is disclosed in the "fine print" of the contract, but you figured you could trust a "nonprofit" company.
Besides, the representative never disclosed the fees as he applied pressure for you to sign quickly. The fees also put you behind with your creditors, triggering late fees. By now you understand the truth: They're not doing credit counseling; they're just passing through your money and skimming some off the top for themselves. That doesn't sound like a non-profit company to you.
Let's examine this arrangement a bit closer. The admin fee will cost you $750 up front. Your first three monthly payments go toward that admin fee and nothing gets put into your trust account until your fourth monthly payment has been paid. The settlement company takes the first $50 of your $250 payment every month as the service fee. That means that only $200 a month is actually being added to your trust account.
Most debt settlement companies will claim to be able to settle your debt for about half of what you actually owe, so let's use the middle credit card debt as an example:If you owe $7,000 on the account and the creditor agrees to accept $3,500 as payment in full, it will take you eight months at $200 per month to have accrued enough cash in your trust account to pay off just that one credit card bill.
But remember, your first three payments to the debt settlement company only paid the $750 admin fee. That means your first credit card isn't really settled until 11 months after you started sending them money! So what is the problem? It's really very simple—your creditor won't agree to accept half of your actual debt amount in settlement unless, or until, that amount can be paid in full. Otherwise, they'll expect you to make your normal monthly payments.
Besides, the representative never disclosed the fees as he applied pressure for you to sign quickly. The fees also put you behind with your creditors, triggering late fees. By now you understand the truth: They're not doing credit counseling; they're just passing through your money and skimming some off the top for themselves. That doesn't sound like a non-profit company to you.
Still Not Convinced?
Here's another example, this one involving debt settlement.Let's say you have racked up $20,000 in unsecured credit card debts. You owe $10,000 to one credit card company, $7,000 to another one and $3,000 to a third one. You agree to contract for a five-year debt settlement plan where you pay $250 a month to the settlement company.
Sounds good, right? After all, $250 a month for five years is only $15,000, so you're saving $5,000, and you'll be debt-free in just five years, right?Let's examine this arrangement a bit closer. The admin fee will cost you $750 up front. Your first three monthly payments go toward that admin fee and nothing gets put into your trust account until your fourth monthly payment has been paid. The settlement company takes the first $50 of your $250 payment every month as the service fee. That means that only $200 a month is actually being added to your trust account.
Most debt settlement companies will claim to be able to settle your debt for about half of what you actually owe, so let's use the middle credit card debt as an example:If you owe $7,000 on the account and the creditor agrees to accept $3,500 as payment in full, it will take you eight months at $200 per month to have accrued enough cash in your trust account to pay off just that one credit card bill.
But remember, your first three payments to the debt settlement company only paid the $750 admin fee. That means your first credit card isn't really settled until 11 months after you started sending them money! So what is the problem? It's really very simple—your creditor won't agree to accept half of your actual debt amount in settlement unless, or until, that amount can be paid in full. Otherwise, they'll expect you to make your normal monthly payments.
So What?
Debt consolidation companies, even the "nonprofits," are in the business to make money. Debt consolidation is nothing more than a "con" because you think you've done something about the debt problem. The debt is still there, as are the habits that caused it—you just moved it! You can't borrow your way out of debt. You can't get out of a hole by digging out the bottom. Real debt help is not quick or easy.
Wednesday, June 23, 2010
The Truth About Bankruptcy
Bankruptcy.
That word sends chills up the spine. If you're facing the prospect of bankruptcy or in the middle of it right now, you know it's a living nightmare. It can devastate your job, destroy your marriage and steal your peace of mind.
Kathy called my radio show ready to file bankruptcy. Her debts were overwhelming, and her cheating husband had left with his girlfriend. The house was in his name, as was all the debt except $11,000. Kathy was 20 years old, and her brilliant uncle—a lawyer from California—told her to file bankruptcy. Kathy was beat up, beat down, and deserted without help, but she was not bankrupt. When her soon-to-be ex-husband ends up with all the debt in his name, he may be bankrupt, but Kathy won't be.
Why Avoid Bankruptcy?
Bankruptcy is not something I recommend any more than I would recommend divorce. Are there times when good people see no way out and file bankruptcy? Yes, but I will still talk you out of bankruptcy if given the opportunity. Few people who have been through bankruptcy would report that it is a painless wiping-clean of the slate, after which you merrily trot off into your future to start fresh.
Don't let anyone fool you. I have been through bankruptcy and have worked with bankruptcy for decades, and it is not a place you want to visit. Bankruptcy is listed in the top five life-altering negative events that we can go through, along with divorce, severe illness, disability, and loss of a loved one. I would never say that bankruptcy is as bad as losing a loved one, but it is life-altering and leaves deep wounds both to the psyche and the credit report.
Types of Bankruptcy
Chapter 7 Bankruptcy, which is total bankruptcy, stays on your credit report for10 years. Chapter 13 Bankruptcy, more like a payment plan, stays on your credit report for seven years. Bankruptcy, however, is for life. Loan applications and many job applications ask if you have ever filed for bankruptcy. Ever. If you lie to get a loan because your bankruptcy is very old, technically you have committed criminal fraud.
Most bankruptcy cases can be avoided with proper help, such as our certified counselors and the Total Money Makeover. Your Total Money Makeover may involve extensive amputation of stuff, which will be painful, but bankruptcy is much more painful. If you take the thoughtful step backward to get on solid ground instead of looking at the false allure of the quick fix that bankruptcy seems to offer, you will win more quickly and easily. I know from personal experience the pain of bankruptcy, foreclosure, and lawsuits. Been there, done that, got the t-shirt, and it is not worth it.
Article Source: www.daveramsey.com
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