Beware the Debt Management Programs

In terms of cost, certainty and benefit, bankruptcy is head and shoulders above ANY type of debt management program, including the many that you hear or see advertised on television, radio or the internet.

Often what occurs in these “debt consolidation” programs is that you end up with a reduction in interest rates on your credit card accounts and a payment program that has no clear or guaranteed end point, because while some creditors may agree to some type of interest rate reduction or a “lower” payment arrangement over several years, many won’t. It is very rare for all your creditors to make a change in payment arrangements, however minimal.

In almost all debt management programs, you will never meet with a live person. All business is conducted over the phone or by mail. In almost all cases, any person you are speaking with is a thousand miles away or more.

The basic problem with these programs is they cannot guarantee any results, because they do not have the backing of law to support any claims they make. Bankruptcy DOES have the backing of law and the guarantee of the elimination of your debts.

In addition, they will not give you specific guarantees (ask them for one); they can be highly evasive about any specific terms they may have worked out with your creditors (ask them to provide to you, on paper, what specifically they have worked out with each of your creditors). Often, while many of these programs hint that they are nonprofit, many are in fact, highly profitable (those commercials are not free).

These programs generally collect four types of fees from you: up-front set-up fees, maintenance and processing fees, settlement fees and a “contribution” which is a term they use to classify the monthly fees they charge you, a term that is a flat-out misleading but which they use to say they are not-for profit. Sometimes they note these fees in their small print and sometimes they don’t and often they don’t give you any papers setting out any terms.

A TYPICAL STORY
A husband and wife came to me after they signed up with The National Consumer Council to “manage” their debt. The brochure said they were nonprofit. In their case, the “Council” said to them, both over the telephone and in the agreement it sent them, that for a payment of $418.00 per month for four years, the “Council” would be able to get them out of their $48,000.00 in credit card debt.

Upon reading the fine print of their agreement that arrived in the mail (some outfits do not even give you an agreement with any specifics to read) the reality became apparent and much different. The first five monthly payments of $418.00 would go towards paying the “Council” an up-front fee of$2,090.00 (they called it a “contribution”).

The couple would also pay a maintenance fee of$48.00 per month to the “Council” and a fee of $ 10.00 for every check the “Council” issued every month to every creditor, which in their case came to an additional fee of $100.00 per month. Over the course of the four years, they would pay this “Council” $9,000.00 plus simply in MINIMUM fees and costs. But, there’s more! There’s the phantom “creditor contribution”, where a creditor can forgive some debt and the “council” will take this as an additional contribution part of the debt forgiven.

Yet, believe it or not, there’s even more. This agreement (which is a typical one) notes, in very small print, that this “Council” makes “NO GUARANTEES” that it could do anything of what it said it could do over the telephone or in its advertisement! And in fact, it stated it would not attempt to work out anything with their creditors until their fee, opps, the contribution, was
paid to them.

Again, remember this well: creditors are under NO legal obligation to change the terms of their credit agreement with you. So after the first five months of this agreement, the "Council" would have been paid over $2,000.00 and then maybe, just maybe, they would work something out with creditors, or maybe with some, but not with others. it gets real messy, real quick!

As is usual in this industry, this particular organization, called The National Consumer Council, has a brochure with all the bells and whistles in it: a picture of the U.S. Capital, a picture of the American flag, a pictures of happy, wholesome looking people and the name “The National Consumer Council”. You would think this is a authoritative organization with some legal punch located in or near Washington, D.C. The reality: it is an outfit located in Las Vegas, Nevada and using a post office box. This is a very common story.

Remember this: When you sign up for one of these programs and they say they will do this or that with your creditors, these programs have not spoken anybody yet. They do not know what they can do and creditors are under no obligation to change anything. That’ s why many take their fee up-front.

Bankruptcy is federal law and all creditors must obey.

The Taxman: one other note: if a creditor agrees to reduce the amount you owe them, the amount reduced is taxable and the creditor must issue to you a 1099C form at the end of the year noting this amount of reduction, and this amount must be declared as income on your income tax return.