When Norm Bour was 24, credit was so hard to come by he couldn’t get a gas station credit card without begging.
Today, a majority of the home equity lines he approves as owner of Priority Plus Lending will be used to pay off Americans’ credit card debts. Nor is his route the only one to spring up in a capitalistic society: Where there’s a need, there’s a buck to be made, even among the broke.
So you can bet that where competition rules, advertising spin appears. If you are considering debt consolidation options, avoid these misrepresentations:
1. Credit counseling, debt management programs — it’s all the same.
Debt management programs — or DMPs as insiders like to shorten it — are one tool in the credit counselors’ kit. Basically, the DMP plays policeman, taking your monthly lump sum payment and distributing it to your creditors until the accounts stand at zero. They then close those accounts. According to Greenberg, less than 35 percent of the people who call consumer credit counseling agencies truly can benefit from a DMP.
2. Credit counselors can cut your monthly payments in half.
And most folks who walk through his doors haven’t missed payments, says Greenberg. These harried souls will see a bit of relief from an interest reduction, but by no means will they magically owe only half their bills.
3. Some companies offer lower interest rates than others.
“They’re using it to get people in and take them so far down the road that by the time they sign the loan papers, they’re committed. They don’t want to start all over again,” he says. It also serves a second devious purpose: lower advertised rates push these companies to the top of the search engine lists.
But just how low is too good to be true? Bour’s rule of thumb: If 90 percent of the lenders are advertising a 5.75 percentage rate, the lone shark waving even a 5.25 should send up a red flag. “But it doesn’t because people always think they’re smart enough to find the deal no one else has,” he says.
4. Some agencies can negotiate lower DMP payments than others.
If a counselor indicates differently, you are in the clutches of a debt settlement program. This version accepts your monthly lump-sum payments, but holds that money until creditors scream. At that point, the debt settlement personnel negotiate to repay cents on the dollar. Your credit rating gets maimed in the process.
|— Updated: April 28, 2005|
5. Debt settlement is the cheapest way to go.
Secondly, this route dings your credit history severely, as all those “pay us now” letters count against you, not the company. Finally, the amount the creditors forgive in the end is considered income for you, and you owe taxes on that amount. “If you’re going to take this route, you might as well declare bankruptcy,” Greenberg says.
6. You need a formal program to get out of debt.
Home equity lines don’t require third-party guidance, nor does refinancing your first mortgage to get your hands on a lump sum of cash. On the flip side, these options still require spending discipline on your end lest you wind up with a mortgage payment, home equity line invoice and another $10,000 credit card debt six months down the road. This time, your house is on the line.
7. Debt consolidation always saves you money.
The truly unfortunate fall victim to flipping — a process that ruined one of Musci’s elderly clients. A lender offers a debt consolidation loan plus cash out, with no out-of-pocket fees. A year later, it calls again to say that since your home has appreciated, could you use more cash? Say yes, and they again sock you with fees hidden into those monthly payments. This cycle continues until you break.
“The consumer thinks this person is taking care of them. But in my client’s case, the company ran up $15,000 in fees, and put her at 100 percent loan-to-value,” says Musci. “She eventually had to sell her house to get out from underneath it.”
Deciding on debt consolidation is a simple formula for Greenberg: Compare your existing minimum payments to what your payments will be for that same debt under the DMP, including fees and voluntary contributions. If the latter doesn’t save you 5 percent to 10 percent, it’s the wrong choice.
8. DMP helps your credit rating.
On the other hand, if you’ve missed payments and it already shows on your report, credit counseling won’t make it worse. That’s when a DMP can improve some situations, as creditors sometimes applaud your finally taking steps to handle debt appropriately.
9. Bankruptcy will ruin your life.
10. Bankruptcy is no big deal.
If you file Chapter 7 — exoneration of all debt — the window is nearly 10 years. With Chapter 13 — reorganization of debt — that seven-year clock starts ticking after you pay off the debt. So if you need five years to get back on your feet, assume this cloud follows you for 12 years.
Employers look at credit reports, and occasionally refuse to hire based on what they find. If you deny bankruptcy on many forms, you can be held accountable later for lying on an application. Insurance companies can deny coverage as well.
In the end, debt management resembles weight loss: No one can do it for you, and the process takes four to five years on average. “There’s no panacea,” says Greenberg. “You have to buy into the process and really work to reach the goal.”
|— Updated: April 28, 2005|