The problem typically starts with an unexpected expense, health or job situation that causes you to put more on your credit cards than you feel comfortable handling, and then the credit card company will unilaterally decide to increase your interest rate to the point where you cannot afford the minimum payments on your cards. You get a new credit card, shift balances around, and work the system until you can go no further. They increase their rates and their profits, forcing a situation where you cannot afford to make ends meet.
You want to do the right thing and figure out how to pay your debts. And Debt Negotiators arrive to save the day, offering to do it all for you, for the low, low price of…
It is ALWAYS too much.
Many states have no regulation of “debt negotiators”, so you could be talking to some person who has no knowledge of the pitfalls facing you if they fail. It sounds so impressive when they say they have been “in the financial services industry for XX years…”, but were they in the debt negotiation business that long? Not likely. More likely, they were part of the mortgage lending scam and are now out of work so they’ve re-tooled their websites and are now offering this Debt Negotiation service. Or they were financial advisors for a business that failed (not exactly the most ringing endorsement).
Do not pay anything more than a very small service fee to a consumer protection agency for this type of service. Enough for them to keep their phone service and postage for your case. Think of it… you owe $50,000 to various creditors and cannot pay it back, but instead, up front, you save up and pay $5,000 to this negotiator, who now has your money and if they’re smart, they have made no promises. They have said stuff that sounds like a promise, but if you look at the fine print, they do not promise success.
The typical contract is something like this: You pay me and I will try to negotiate all your outstanding debts, but if the creditors refuse to negotiate, I did my best and will not refund what you paid to me.
What usually happens is something like this. Let’s say you owe $10,000 each, to each of 5 different creditors for a total of $50,000. You qualify for bankruptcy today, but if you only owed $45,000, you would not qualify (the means test for bankruptcy court is to blame for this). Creditor number one negotiates, agrees to take 50 cents on the dollar, if you pay it up front. You sell the good china and your wedding ring, and saved up a few months to pay them $5,000 to wipe yourself clean of the $10,000 debt that you owe to them. In saving up this money, you missed minimum payments for creditors 2, 3, 4 and 5. For Creditor 2, the negotiator works hard to reduce the payments. They refuse to reduce the principal amount of the debt and take a lump sum up front to pay it off, and insist that the best they can do is reduce the interest rate and the minimum payment. You agree. The same works for creditors 3 and 4. But Creditor 5 is stubborn. They know they can get full payment of everything due to them if they push, and they file lawsuit.
You owe the debt so they win. They also get $2000 on top fo the $10,000 that you already owed, to pay for thier lawyer. Now they get to garnish your wages. What this means is that 15-25% of your pay will come out of your check before it gets anywhere near you, every payday. You now have to pay off creditors 2, 3 & 4 with what’s left AFTER Creditor 5 gets his share of your paycheck. AND you still have to pay rent, utilities, and feed yourself. Suddenly, there’s not enough left, and you fall behind on your payments to 2, 3 &4. Creditors number 2, 3 & 4 file suit. They win. You are now paying what you owed to them, PLUS their lawyer’s fees for filing the suit. A total of $8,000 worth of legal fees on top of the $50,000 you already owed. But in the meantime you've paid off the first creditor and most of the second creditor's lawsuit. In the year this has been pending, you have gotten to where you only owe $45,000. You've paid a TON of money out and only reduced your total debt by $5,000. You cannot make ends meet, but you no longer qualify for bankruptcy. Your wages will be garnished by creditor number 2, then number 3 will take over, then number 4 and finally 5. By the time your'e finished paying these debts off, you will be past retirement.
Your Debt Negotiator has the $5,000 that you paid for this service and their contract is finished. The first several times this happens to the Debt Negotiator, they act all surprised… “this never HAPPENED before!” Because of the timeline of events, these things take a few years to get clear, but it eventually happens to most debt negotiation clients. Eventually, the Debt Negotiator realizes that their job is not a public service. Their job is just to sell their service and get their cash out of you before your other creditors get it and before you end up in bankruptcy court (if you're lucky enough to still owe enough money that bankruptcy is an option). This is true whether their fee is $500 or $5,000 or more. If it’s more than the price of mail and phone service, then it is more than you can afford.
Spend your money on something that may be more painful but ultimately more successful… hire a lawyer if you need to defend yourself against a lawsuit by a creditor… hire a financial planner or credit counselor if you need help in deciding how to live within your means…. Spend the money to consult a bankruptcy attorney so that you know your options and understand the whole picture before you try to negotiate your own debts. Understand that your creditors know the whole picture a lot better than you do. They’ve been through this before. So you are better off getting information than in handing a shoebox full of bills and a stack of money to a slick salesperson with a slick website who promises to perform miracles on your shoebox. In most cases, you’d be better off spending your money on paying down some of the bills in the shoebox. In many cases, you’d be better off spending your money on snake oil.
