Juan, a client, came to me this morning asking for help in regards his debt problems. He signed up with a debt consolidation company in order to get relief from his debts. Instead, he is now in a worse financial position than he initially was before he signed up with the debt consolidation company.
Juan initially saw the advertisements of this debt consolidation company in print ads. This company’s ads claimed that it would help solve Juan’s debt problems. The promise was that creditors would waive 60% of Juan’s debts. Already being in financial hardship, Juan, immediately signed up with this debt consolidation company thinking that this was exactly the relief that he needed.
The welcome letter that Juan received from this company after he had signed up, reads:
Juan signed the necessary documents to enroll with the debt consolidation company. The arrangement was that $490 a month would be deducted from Juan’s savings account and paid to the debt consolidator. For the next 7 months, the debt consolidation company continued to deduct $490 monthly from Juan’s account. In the meantime, the debt consolidation company did nothing but collect the $490 monthly. The Creditors then sent Juan’s account to a collection agency. Still the debt consolidation company did nothing. Now, Juan’s account is already with an attorney for filing of a collection lawsuit and his debts have also increased with interest and penalties accruing.
When Juan signed up with the debt consolidator he was blinded by the promise waiver of 60% of his debts. This would indeed be a very attractive offer to most debtors. Unfortunately, Juan did not understand the way debt consolidation/negotiation companies work. As stated in the debt consolidation company’s “welcome” letter to Juan above, to reduce your debts, there are 3 things to the negotiation process: (1) accounts being delinquent, (2) money to settle, and, (3) creditor willing to settle.
Did Juan really need the help of a debt consolidation company to reduce his debts? Even if we just look at the letter of the debt consolidator it would be very easy to see that Juan never really needed the help of a debt consolidator. The debt consolidator’s letter states that to be successful in negotiating a reduced debt, the first requirement is that the account be delinquent. Juan does not need the help of anyone to make his account delinquent. All he needs to do is just not pay his debts and his account will be delinquent.
The second requirement in the debt consolidator’s letter is that there is “money to settle”. Where is this money coming from? Juan failed to understand that the “money” that is to be paid to the creditors in fact is to come from him. The way it is supposed to work is that the debt consolidator would accumulate his $490 per month for the next so many months and put it in an “account”; and, when there is enough money in the “account”, then they would negotiate with the creditor for a reduced debt. Problem with this is that a certain percent of the $490 will be paid to the debt consolidator as their fees and only the remaining balance will be credited to Juan. Why could Juan not have just saved the whole $490 himself instead of paying the debt consolidator to accumulate his money? Likewise, it is also a common horror story for the debt consolidation company (or its owners) to abscond with your money in the “account” and leave debtors with nothing when it is needed. Thus, it never made sense for Juan to give the $490 monthly to the debt consolidation company for accumulation when Juan could just as easily have saved the whole amount himself and have it within his control all the time.
The third requirement is that the creditor must be willing to settle for a lower amount. Once again, did Juan need a debt consolidator to have a creditor willing to settle? Why pay someone else to settle your debts when you can as easily just call your creditor and negotiate debts yourself. If a creditor is willing to negotiate with a debt consolidator, then there is no reason why it would not also be willing to negotiate with you. In fact, some creditors flat out refuse to negotiate with debt consolidators.
Only you can decide whether or not a debt consolidator will be able to help you. However, in my practice, I have yet to meet a debtor who has been satisfied with the results of a debt consolidation company.
In the end, Juan ended up with more debts now than when he started out 7 months ago. He is now preparing to file for Chapter 7 bankruptcy. He is looking forward to having a fresh start after wiping out 100% of his debts instead of just being satisfied with 60%, which was an unfulfilled promise, by the debt consolidation company. .
(DISCLAIMER: material presented above is intended for informational purposes only. It is not intended as professional advice and should not be construed as such. Rey Tancinco is a partner at Tancinco Law Offices, a professional corporation with offices in San Francisco, Vallejo, and Manila. The law office website is at: tancinco.weareph.com/old. Rey Tancinco can be contacted at (800) 999-9096 or (415) 397-0808 or via email at: attyrey@tancinco.com
