They make look tempting – those late night television commercials that promise to help debtors avoid bankruptcy by consolidating debt – but these debt consolidation scams are very expensive and highly suspect.
When facing mounting bills and financial burdens, it is important for debtors to understand the many pitfalls of using debt consolidation companies. Here are some of the dangers of companies that claim they can help you get out of debt by consolidating your debt.
Most scams will require debtors to pay a minimum monthly fee just for using their “services.” These services are generally no more than pulling money from the debtor’s bank account and waiting for money to amass. These fees can average around $450 per month, and the company is paid before any creditors – meaning the company gets paid each month but the debtor’s financial situation has not necessarily improved at all.
Whereas attorneys can be held accountable for failing to assist debtors with financial negotiations, most debt consolidation companies structure themselves in such a way that debtors can only sue them with great difficulty. Here's why.
Creditors are more apt to settle for pennies on the dollar if they can receive funds immediately. Therefore, most debt consolidation companies require that debtors make very high monthly payments into the company's account so that they can amass funds to pay creditors in a lump sum payment. If debtors cannot afford to do this within a very quick timeframe, they are left with paying the very high monthly “service” fee (see above) while their money slowly accrues. The debtor’s money is occupied at the debt consolidation company and is no longer available to the debtor to be used for food, utilities, emergency costs, and other monthly living expenses.
Debt consolidation scams will not begin negotiations until a great amount of the debtor’s money is amassed in the company’s bank account. Even then, debt negotiations take time and the debt consolidation company has little incentive to speed up the process because it gets paid its “service” fee for each month that it works on the debts. While the company is gathering money, the creditors are not getting paid. This sets in motion a snowball effect of accruing interest, harassing phone calls, and harassing letters to the debtor.
Most scams require that the debtor allow the debt consolidation company to draw directly from the debtor’s bank account. This becomes problematic when the debtor struggles to pay other monthly bills and/or the debtor suffers a loss of income. Also, most companies will not cease the direct withdrawals upon the debtor’s request. Rather, the debtor is often forced to close the bank account to stop the automatic withdrawals.
At the end of the day, if the consolidation company has not started any negotiations, or has not successfully completed any negotiations, you will be stuck with all of the debt that you started with -- and will have lost all of the monthly “service” fees you have paid. Also, if the company keeps all of the money that it has taken from the your bank account, due to low accountability (see above) there is little that you can do to recover the funds.
When the debt consolidation company steps in to handle the debts, the debtor can easily lose track of the debt that is owed and rely too readily on the consolidation company to handle these bills. However, the consolidation company, as mentioned above, may not be doing much of anything to pay these bills and the debtor is ultimately left with the accrued interest rates, fees, costs and possible litigation associated with the debt.
Even though the creditor is working with the consolidation company, creditors can continue to call the debtor and demand payment. This can be very frustrating for the debtor because the debtor is paying for the consolidation company’s “services” yet still continues to receive these phone calls.
Again, even though the creditor is working with the consolidation company, creditors can still sue the debtor if the consolidation company has not paid the debts. If the creditors are successful, the debtors can face wage garnishment, bank levies, and possible repossession of secured property.
Although it may be tempting to use a debt consolidation company, be very cautious of these services. Most debtors will be better off trying to negotiate debts on their own. To learn how to negotiate with creditors and settle debts, see our Debt Settlement & Negotiation area.