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Protect Yourself From “Too Good To Be True” Debt Consolidation

There’s no doubt that debt is a huge problem in the United States. But an even bigger problem are the companies that offer “too good to be true” debt consolidation. If you’re facing large amounts of debt, you need to know how to protect yourself from companies that are only out to make a dollar off of you.

Massive Amounts of Debt

It’s estimated that roughly 77 million Americans have debt. That means 35% of adult Americans have issues dealing with debt. On average, a household owes $16,000 in credit card debt. And consider this – when you are stuck trying to pay down something, that means all your money is going towards that payment, which can mean incurring debt on the other end. For example, take a recently graduated student that has to pay $450 a month towards her student loans. When her paycheck is going towards that, how is she going to pay for other things? Exactly, she’s going to have to put it on a credit card. Cut to buying a car, paying rent, paying for food, and you’ll see how payments for just standard living costs can snowball.

Of those 77 million Americans, 5.3% have a credit file that contains a report of a past due debt, which means they are between 30 and 180 days later on a non-mortgage payment.

Debt Breakdown

Credit card debt is the third largest source of household indebtedness behind mortgage and student loan debt.

As of October 2015, here’s the breakdown of average debt:

  • Credit card debt: $16,140
  • Mortgage debt: $155,361
  • Student loan debt: $31,946

It’s obvious that the average American is dealing with debt, but what can we do about it?

Debt Consolidation Ads

Because debt is something that seemingly everyone has, it makes sense that there has been a large emergence of companies that offer “too good to be true” debt consolidation. These companies make it sound easy to eliminate debt, but the truth is, they can often do more harm then good.

It’s important that you do your homework, but that you also don’t view “debt consolidation” as a quick solve. You’re going to need to change your spending habits.

Kim Sands from Greenpath, a non-profit that counsels people on their money management, including debt, has this advice for those looking to consolidate their debt:

“Free First Call”

Most companies will claim that your first call is free, but that there’s no obligation to use them. That “first call” often turns into them calling you every day to try and get you to consolidate with them. Sands says she often hears this complaint: “They are so high pressure. I have people who say, ‘I called them with a few questions, and now I can’t get them to quit calling me.'”

According to Sands that first “no obligation” call is where the high-pressure sales pitch starts.

“It’s so easy to get confused,” she said. While you might feel pressured, it’s important to shop around to find a company that isn’t looking to make a quick dollar off of you. Don’t feel obligated to work with them just because they keep calling you.

“We can cut your bills by thousands”

Be wary of companies that promise they can cut your bill by thousands, avoid high interest foreclosure, and settle your debt for up to 60 percent of what you owe.

While 60 percent may sound amazing, and it does, it’s also too good to be true. According to Sands, you’ll end up paying what you owe – 100% of it.

“Debt settlement companies often will charge – Let’s say your payment is $500. They will keep the first three months’ payment as their fee,” she explained. “Then they take a percentage of what they pay out. So if they pay $2,000 on a $4,000 credit card, they may keep 20 percent of that too. So a lot of what you’re sending them is a fee.”

Have legal representation

An attorney for a debt consolidation company cannot offer you legal protection, so if you’re looking for protection from creditors, the only thing that will protect you legally is bankruptcy. That being said, there are ways to work with creditors to stop the harassment, while also settling your debts.

But as Sands says, never pay a company to do what you can do yourself. You will not get a better debt settlement just because you are working with a debt consolidation company.

Debt Consolidation Tips

So, you’ve decided to forgo working with a debt consolidation company, but that doesn’t help the fact that you’re still dealing with debt repayment. Here’s what you’re going to need to do:

Stop spending. This is probably obvious, but you need to get your spending habits under control. Any other piece of advice will not help you if you are wracking up debt as quickly as you are trying to pay it off. It’s time to start a budget when it comes to food and other expenses. You’ll need to be strict until you have your credit card spending under control.

Look for lower rates. Take a look at all of your credit card interest rates. Once you have a list, start calling around and asking the credit card lenders for a lower rate. They won’t always say yes, but it can save you lots of money if they agree to it. You might also mention that you’re experiencing trouble paying it off. Credit card companies are often very willing to help you in order to ensure that you stay a customer with them.

Consider consolidating your credit card debt. A debt consolidation loan from a bank, or a peer-to-peer lender can help you combine all your debts into one place. Taking advantage of a 0% balance transfer offer is also great because many of these offers come with low interest or even no interest for up to a year. This means that all your monthly payments are applied to the principle and not the interest. Once you have all your debts in one place, you can pay them all down with one monthly payment.

Pay off more than just minimums. After you lower your interest rate or consolidate your debt, try to pay down the balance in an aggressive way. Even a small increase from just paying the monthly minimum can save you tons of money on interest. This is especially true if you have consolidated with an interest free credit card. In these instances it’s crucial that you pay down the balance before that interest free time period expires.

Create a repayment plan. Many lenders will work out a repayment plan with you to repay debt. You can also work with a credit counseling service to create a repayment plan. This helps keep you on track, while also providing a light at the end of the tunnel to where you can see yourself being debt free.

Bankruptcy As An Option

If it’s determined that bankruptcy might be the best option for you, you’ll need to understand the basics. You have most likely heard the term “Chapter 11 bankruptcy” or Chapter 7 or Chapter 13 bankruptcy. But what is are they?

Chapter 13 and Chapter 7 Bankruptcy

Chapter 13

Chapter 13 bankruptcy is designed to allow you to keep all of your property, but is also determined by your property. The amount of your nonexempt property affects how much unsecured creditors get paid during your bankruptcy process. And to avoid foreclosure or repossession, you still need to keep up with the payments you make for you secured debt, such as mortgages or car loans.

Chapter 7

When you file a Chapter 7 bankruptcy, almost all of your assets and property are liquidated and thus become property of the bankruptcy estate that is sold to allow you to repay your debts. There are some exceptions to this though.

During your Chapter 7 bankruptcy, a bankruptcy trustee is appointed and given the authority to sell your assets so that you are able to pay your creditors.  Just because your assets are being sold, that does not mean that all of your property needs to be sold.

Differences in Chapter 7 and 13 Bankruptcy

In Chapter 13 bankruptcy, a trustee will not sell your nonexempt assets and distribute the proceeds to your creditors. That’s how it works in Chapter 7 bankruptcy. Rather, you will need to put together a repayment plan that shows your creditors how you plan to pay back some or all of your creditors. You get to keep your property in exchange for paying back a certain amount of the debt you owe. But remember that the more nonexempt assets you have, the more you will need to pay to unsecured creditors.

When you file for Chapter 7 bankruptcy, a trustee takes the nonexempt property, sells it, and uses the proceeds to pay your general unsecured creditors. But because you keep all of your property with Chapter 13, it’s unfair to your unsecured creditors if they do not get paid as much as they would have had you filed for Chapter 7.

Because of this, if you file Chapter 13 and create a repayment plan, you will still need to pay the general unsecured creditors a dividend at least equal to the value of your nonexempt assets. So if you have a large amount of nonexempt property, you hay have to repay the unsecured debts in full.

Chapter 11 Bankruptcy

Under Chapter 11 bankruptcy, the business or individual undergoes a reorganization in order to pay down its debt and reorganize its income and expenses while regaining its profits.  If your business is a corporation, limited liability company (LLC) or partnership, it can continue business operations during the bankruptcy process. While the business is making payments through the debt repayment plan, the business continues operating.

The Chapter 11 bankruptcy process can be a complex, and lengthy one. If you are facing a Chapter 11, you’ll want to work with a bankruptcy attorney to understand the process and what you will need to do to move through it.  They will be able to explain the terminology in addition to what is legal, and what you will be required to do.

Simon Resnick Hayes LLP

At RHM LAW LLP, we will help you explore all of the debt relief options available to you. Though we specialize in bankruptcy law, we do not suggest bankruptcy as an option if we do not think it is the best option for them. We are committed to helping our clients resolve their debt problems, achieving true debt relief and avoiding potential debt consolidation scams. Contact us for a free consultation.

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