Why ALL Offers to Eliminate Credit Card Debt are Scams - credit card modification - debt negotiators - debt settlement

A friend recently called me asking what I thought about a so called No Interest Credit Card Modification Program.  These are the exact bullet points provided by the "Sr. Financial Consultant", aka Sales Rep, in an email to my friend:

"How it works:

1. We contact the creditors and inform them that your are consolidating your debt
2. You are responsible for the 1 consolidated payment and funds are dispersed to your creditors accordingly
3. You are out of debt in 48 months or less (depending on term you choose and if prepayments are made)
4. Her credit score and DTI should be in a much better standing--assuming you follow our advice to not incur more debt, make the 1 consolidated payment on time, and continue to pay on any debt left outside of the consolidation"

Sounds pretty straight forward doesn't it?  Providing a service that will make your credit card companies accept thousands less than you owe and you can pay it all off in a period of three to four years, vs the seventeen plus years it would take paying minimum payments.  Hah!

Anyone that claims you can pay less than you owe on credit cards is not promoting a method that will save you or keep your credit rating from being injured.  Notice how there isn't a single negative point detailed in the Sr. Financial Consultants provided information.  The sad reality about these predators is that they are ultimately going to coach you into defaulting on your accounts, if you haven't already.

If you've already damaged your credit history that may not seem like much of a consideration, but there are other considerations.  One being that you will ultimately receive IRS Form 1099 from any creditor that you pay less than you owe.  The total amount that they agree to forgive, or not collect on, will be viewed as income that you must report on your personal taxes and ultimately pay income tax on.

The Sr. Financial Consultant also fails to mention any details regarding taking a cut, or charging a hefty fee on what you ultimately pay.  The zero interest component is an interesting twist too.  They are suggesting instead of paying the creditors, they begin saving up money with a set monthly amount put aside.  They will wait out the creditor, while the account is in default, until they can get the creditor to accept less than the amount owed.  The idea is that you have hopefully set aside an amount that is adequate to make the one time payment.  This assumes they actually accomplish getting all of the interest stopped or waived on the account since the time you defaulted.

Lets say you have an account that you owe $10,000 and they get the creditor to accept a settlement of $5,000 a year or two from now.  They are going to have their "fee" included when they present you the settlement.  That fee could be ten, even twenty percent.  So you are ultimately going to pay their "fee" on top of the $5,000 actually going to the creditor.

Most credit card companies will negotiate at some point.  They usually become more aggressive with their willingness to negotiate repayment terms the more months pass by with no payments received.

If you have managed to make minimum payments up until this point, creditors are not going to do anything for you.  They want you to keep paying that minimum payment forever.  That is why they extended the credit line in the first place.

The bottom line is the only leverage you will ever have negotiating paying back less than you owe to a credit card company is by actually defaulting and stopping payments entirely.  The sales pitch from every form of business that will prey on you "to help you with your debt" focuses on what you want to hear.  The thought that you can repay less than you owe can be a very enticing subject, especially when you are under the stress of large balances on your credit cards that you no longer believe you will ever be able to pay off.

The truth is that you can accomplish anything you're being told by one of these people by yourself.  No matter what spin they place on it, no one has any special methods or connections that make their options better or magical.

​So what can actually be done when you are drowning in credit card debt?

Your first consideration should be how you may be able cut all non essential expenses and create a budget that works to manage everything.  If you haven't damaged your credit than look at all potential loan options to consolidate your debt into one payment at the lowest interest rate possible.  There are some very aggressive lenders that offer consolidation loans.

I would never consider a home equity loan or mortgage refinance to take cash out to pay off credit cards.  Putting your home at risk is a very bad idea and quite often leads to people continuing the cycle of using credit cards and accumulating even more debt.  If that happens to be your only option and you actually consider it, be sure you think it through very well.

Whatever you do, all your credit cards should be cut up and thrown away.  You have to take a stand and commit to stop being a slave to credit cards.

The second consideration we are going to assume you have managed to make minimum payments.  You may have paid late on occasion, but you have continued making payments on all accounts. 

- Create a solid budget to understand exactly how much money you have available to divvy up among your monthly credit card bills after all of your essential living expenses are paid.  You need that knowledge before you attempt calling any of your credit card companies.

- You need a good story or hardship explanation that you can use to explain how you arrived in this predicament.  Think outside the box and come up with something.

- If you call a credit card company and tell them you are no longer able to make payments they are highly likely to pose you with options.  One may include their offer to close the account to any further spending along with lowering your interest rate (sometimes to zero percent) for a period of time (I've seen as long as eighteen months initially).  Be prepared though, you are admitting you are having trouble so it is likely that the card company will take action to lower your credit limit immediately no matter what you ultimately decide to do.

- Any offer they make is not going to go away immediately.  You ultimately need the options of all credit card accounts you have in front of you so that you can consider everything at once.  Hopefully the combination of potentials with each creditor will get you to a manageable monthly total and you can get on a path to pay everything off.  

The third consideration gets a little more intense.  These details consider you are already past due on all or most accounts, have completely stopped paying, or have realized you can no longer pay your monthly credit card bills.  You will now need to focus your effort in arriving at settlements somewhere down the road, hopefully for far less than you owe.

- If your budget determines that you have no money to put towards credit card payments, then don't.  You have to take care of your basic living necessities first.  You should not let credit card debt cause you to be delinquent on your mortgage, car payments, or any other necessity.  You are probably faced with the scary idea that you have or will damage your credit, but if you are in this situation that should be the last concern.  You have already proven you don't need to be utilizing credit any longer.  Consider the damage done and start working on your plan to recovery.

- Being delinquent on credit card bills will trigger endless phone calls and letters from credit card companies.  It doesn't hurt to talk to these collection reps, but unless you have questions about options or some form of payment to offer it really isn't worth your stress.  So grow some thick skin and just know that they want their money and are going to hound you.  You do have the ability to send creditors a letter that requests they no longer call you, but they will still mail collection items thereafter.  You can always call them when you have a need to discuss something.

- Once a credit card account is severely delinquent there really isn't a way to salvage the account.  The credit card company will shut you out of your account and they are only focused on getting paid back.  As each month passes, with no payments received, they will be more likely to offer you a lesser amount than you owe to satisfy your account.  Some of them may even offer it by way of installment payments.  Any payment plan terms or settlement agreement that you are considering must be in writing.  Consider anything that you don't have in writing to just be hypothetical.  There are tons of horror stories of consumers entering into a payment arrangement or settlement agreements, that they didn't completely understand, and the creditor didn't hold up their end of the bargain.

- You have to find a way to start accumulating money to be able to take action on a good settlement option.  Since you haven't been making any payments you need to set an amount every month that you put aside, just as if you were making payments.  Even if the budget is still very tight you can at least feel better about the idea that you are putting money aside that is going to actually accomplish something instead of throwing it away on minimum payments.

- Credit card companies, in the end, are left with only one option to escalate their collection efforts.  They can call and mail letters all day long, but they also have the ability to file a lawsuit to pursue a judgement against you for what you owe.  They don't always take that action, but you have to assume they might.  Sometimes they just write off the debt and sell it for pennies on the dollar to a third party that will continue to try to collect on it.  If you are served with notice of a lawsuit it is very important that you file a reply or answer to the court within the time allowed.  This being a legal matter I highly recommend that you contact a competent attorney in your area to discuss your situation and options.  You have to take lawsuits very seriously.  In some states creditors with court awarded judgments have a lot of options to pursue you, including the ability to garnish your wages.

If you are faced with a debt pile, especially credits cards, I know how stressful it can be.  You just have to focus on the fact that you never intended to be in this situation.  The credit card companies make billions of dollars allowing people to over extend themselves with debt in the name of interest and profits.  You just have to make a plan and work through it!

For more reading on debt issues and pursuing a Debt Free Lifestyle click here.

Feel free to comment on this post and I will be sure to respond...

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