The total consumer debt in the United States has ballooned to over two
trillion dollars a full 100% greater than it was just a decade ago. As
a result more people than are in need of debt relief services. But like
with all burgeoning industries, there are a number of scams and
ineffectiveness in many debt relief services. As a result, it is
important that consumers considering debt relief know their options.
Debt Consolidation
The most well-known form of debt relief is debt consolidation. The
principle behind debt consolidation is that by combining the many small
debts, many of which are very high interest such as credit cards, under
a single lower interest loan, you can get control of your debt. Under
the single lower interest loan, the overall cost of servicing the debt,
that is your total monthly payment, is lower than the combined total of
the many smaller debts. That at least is the theory behind all debt
consolidation programs.
Many programs go further, however, by limiting your discretionary
spending. The theory goes, that because you have accumulated so much
debt through your own uncontrolled spending, the debt consolidation
lender will in effect act as your accountant too. The limitations
placed on you by debt relief programs range from prohibiting major
purchases like as a new car or home, all the way to those organizations
which take your paycheck before you get it, and then dole out to you
the remainder. While the latter version sounds intrusive, and certainly
it is, it may prove for some individuals the best option as it will
force a rationing of discretionary spending. But one thing you can
count on with almost every debt consolidation program is the
requirement that you cut up all of your credit cards. As credit is the
number one contributor to consumer debt today, that isn’t all that bad
of an idea.
Creditor Negotiations
But debt consolidation isn’t the only option available to those in debt
crisis. Another option is to hire a creditor negotiator. These
services, usually under the name debt management or debt managers,
mediate negotiations between you and your creditors in the hope of
lowering your total debt. In effect, these individuals bargain with
your creditors, threatening them with the possibility of you seeking
bankruptcy (in which case they get almost nothing) to try to get them
to lower the interest rate, or the principle of your debt. This can be
a very effective method for those unable or hesitant to secure a new
larger debt through a debt consolidation loan.
The problem with both of these options is that they do not come for
free. While many organizations present themselves as non-profit or even
public servants, the reality is that almost every agency is in business
because of the profits they can make off of you. For example, many
individuals in need of debt consolidation are so thankful to find a
willing lender that promises to lower their monthly payment, that they
fail to examine closely the loan contract they are offered.
The Negatives and Scams of Debt Relief Programs
A common scam is to hide huge “service fees” or “debt consolidation
fees” in the principle of the loan. So, if for example you have $50,000
in outstanding debt, your debt consolidation lender may provide you
with a loan as high as $80,000, where the extra $30,000 is comprised
almost entirely of fees. The lender then extends the loan out for years
and years, so that your monthly payment is actually lower and as a
result you do not ask any questions. Another, even more devious scam is
to vary the interest rate over the life of the debt consolidation loan.
For example, the lender might offer you a loan in which for the first
two years the interest rate is an extremely low percentage, say 4%. But
very quickly, the interest rate balloons to something like 15% at which
point you will no longer be able to make payments and must go back to
the lender and “consolidate your debt” once again.
But debt consolidation lenders are not the only one’s trying to scam
you. Creditor negotiators seem to offer a problem-free solution to your
debt troubles. They offer to negotiate with your creditors, making the
process seem infinitely more complex than it actually is. In truth,
many individuals can simply negotiate with creditors themselves. The
threat of bankruptcy is very real for many lenders, and as a result
many are willing to offer you alternatives to the current high interest
rates they are charging you. By cutting out the middle man credit
negotiator, you can save much by way of charges, for the rather minimal
hassle of calling the creditors yourself.
Both debt consolidation and debt management services fill important
niches in a world where consumer debt is increasingly prevalent. It is
important to remember, however, that these companies make money off of
you. And because the industry is in a stage of rapid growth there are a
great number of companies working on the edges of the law if not
engaging in outright predatory lending. By entering the world of debt
relief you are entering the world of scam artists and sub-prime
lenders. Educating yourself before you enter the arena is the only way
to ensure that you attain the best debt relief for you.
