debt consolidation, good move at the expense of my credit?
June 22, 2014 8:32 AM   Subscribe

briefly, over the last 3 years i experienced various times of unemployment. I've unfortunately accumulated about $45k in credit card debt. Does it make sense for me to have a debt consolidation service negotiate my balance down at the expense of my credit?

My credit is just okay ... i think my score is around 650, this is mostly due to my income to debt ratio, as i'm maxed out on my 2 cards, and i have a revolving personal line of credit that's almost maxed out.

I've been working for a new company for the past 3 months & it seems like it will work out for me... but i have all this debt to deal with. I'm paying my minimums (I know that's a bad thing) at about $770/month...

I'm on time with everything... not late on anything... but struggling month to month to get by. 2 credit cards are at 6.24% & 10.24%... & the personal line is at 7.75%.

I debt consolidation service contacted me... & pitched me the same offer that i've heard often in the past;... they'll take the $45k... & negotiate it down to around $18k. they take 18% on the total amount ($8k)... there's another $10/month or so in 'maintenance fee' (which is the cost of opening up a 'escrow' type account.

Essentially saving me about $18k total, & having it all paid off in 3 years max (no prepayment penalty). The catch? I stop paying these creditors & only pay this debt collection company... they issue the payments, deal with the creditors when the call, etc.

Now, i own one of my cars, and my wife's car we're about $10k left on or so... I'm a number guy... & I get it.... but after going to fico's website & seeing how the credit score is determined & I realize it will have a negative impact on my already just so-so credit.... is this the right move for me?

They all offer similar programs at similar costs... but should i do this? I'm in my house now about 9-10 years... i don't think we're moving anytime soon.... (we're sideways on our house...) I don't think i'm looking to buy a car or anything.... So, does it matter that my credit gets hurt? I know after a period of time it gets rebuilt....

I love the fact that in 3 years (max) this giant elephant of debt i've been living with will be gone... but should i care so much about the detrimental affect it will have on my credit?

I'm happy to elaborate further if more explanation is needed....
posted by foodybat to Work & Money (20 answers total) 3 users marked this as a favorite
I have heard entirely too many cases in the past where debt collectors told people to stop paying the creditors directly and then payments were not actually issued, causing defaults that resulted in garnishments. If you're willing to sacrifice your credit, go talk to a bankruptcy attorney.
posted by Sequence at 8:49 AM on June 22, 2014

Is the hit to your credit score the same with a bankruptcy as it would be with the debt consolidation?

Have you tried moving your debt around to lower interest cards? You just keep moving it after each 0% period ends. I don't how long the banks are going to continue this bit of public penance but it has saved me lots of money and my debt is almost paid off.

Some people really like these kinds of services. I know a few people that have used Consumer Credit Counseling with mixed success.
posted by cairnoflore at 8:52 AM on June 22, 2014

I am massively suspicious of the debt consolidation service, especially one that approaches people with a "too good to be true" offer and a low, monthly "maintenance" fee. How confident are you that you've received all the fine print, and that you understand it?

Also, you can talk to your bank about it, and see what they say in general about debt consolidation, to get their perspective. It's entirely possible that the consolidators are doing something tricky with moving balances around or depending on paperwork lag, and it's all fine until one night they fold up shop and you find you're still liable for the whole debt. One thing that alarms me is the consolidator saying they'll negotiate it down to a certain amount--they can't promise what the credit cards and the bank will negotiate down to, or if they'll negotiate at all. And if you hand it all over to them, you lose all certainty that the debt has actually been properly discharged.

Like you, I got into a credit hole, and it was painful to dig out, but all it took was some discipline and patience on my part, and I didn't need a potentially dodgy third party for it.
posted by fatbird at 8:58 AM on June 22, 2014

I have had to do this and know others who have had to do this, and it did not worsen our credit score, because the cards were effectively frozen while payments were made. We paid $20 a month for 4 years for them to manage the entire process.

As for concern about payments: you get a monthly statement, just like one huge credit card bill (ouch), so you can monitor that payments are going out on time, etc.

We had so much debt, it was the only way we'd ever catch up enough to pay it off, while our household income was too high for effective bankruptcy filing.

Please feel free to memail me if you want to discuss further or get into the nitty gritty. Overall, I highly recommend doing it, if you can.
posted by Ink-stained wretch at 9:04 AM on June 22, 2014

Debt consolidation services generally are not very good for you. Think of it from the perspective of your lender: what incentive does it have to reduce the amount you owe just because a debt consolidator asks it to?

The lender is much more likely to sell your debt to a collection agency, write off that portion of the debt it does not get from the collection agency, and then go about its business. The collection agency in turn has a number of legal remedies at its disposal to pursue the debt (and you have a number of protections from same).

But no party save you has an incentive to work with a debt consolidator because, again, if your debt is unrecoverable, that's a write-off for the lender (or collection agency) and a write-off is an expense that reduces taxable income for the lender.

So...I don't see what advantage there is to working with a debt consolidator. If you're really in dire circumstances, speak with a bankruptcy attorney about your options as they pertain to bankruptcy.
posted by dfriedman at 9:19 AM on June 22, 2014

Nope. It's bullshit and crappy.

Do a Debt Snowball with what you've got now.

It works really well, (Dave Ramsey is a bit much to take, but the advice is solid.)
posted by Ruthless Bunny at 9:22 AM on June 22, 2014 [4 favorites]

I second Ruthless Bunny. It's not going to be easy, but doable and worth it. Plus, taking the harder road will ensure you don't wind up in a worse debt hole later on.
posted by lunastellasol at 9:25 AM on June 22, 2014 [1 favorite]

No. Terrible idea even if they do succeed in negotiating payments and dont screw you on the repayment (by not sending full payments etc). You dont want a creditor filing a notice that they accepted less money, then being sent a notice by the IRS that due to the creditor filing paperwork, you now owe more in taxes.

Before going the snowball route, read the Credit Boards website thoroughly as well. The issue with the snowball as Ramsey has it, is that you are asked to ignore interest rates. You could shoot yourself in the foot by paying minimums on debt that will grow longer and cost more. This is a good explanation of the debt ladder.
posted by mitschlag at 10:36 AM on June 22, 2014 [1 favorite]

From a Mefite who prefers to remain anonymous:
Some people really think these services are the way to go; I looked into it with a couple of companies and found it was easier to just negotiate with my debtors and I felt that I saved money, time, and hassle by just settling. But these were debts in collection. I don't think that debt consolidation is quite so successful negotiating your debts when the debts are current.
posted by LobsterMitten at 10:49 AM on June 22, 2014

I would seriously consider bankruptcy in your position. Many bankruptcy attorneys will do a free/low cost consultation and let you know if it would help you in this situation based on your income, family size, and the assets you own.

Let the attorney know what you want your good credit for. Bankruptcies fall off after 10 years, but I know many people who were able to get loans for houses, etc, after three years despite having the bankruptcy on their credit.

Debt consolidation has a skeevy reputation for a decent reason. A fair number of times the who thing goes face up and the debtors are left with more debt than they started with and seriously dinged credit.
posted by bswinburn at 11:24 AM on June 22, 2014 [1 favorite]

Consider thinking hard about your lifestyle and expenses and putting your money toward paying off the money you owe people instead. You mention owing $10K on a car, which makes me think you haven't taken a good look at your budget in a long time, since I have a $3000 car that gets me where I need to go without debt. I think you have a deeper problem to ponder than your current consumer debt.
posted by metasarah at 12:43 PM on June 22, 2014 [1 favorite]

You'll probably have to have paid off all the debt and be "done" with the credit counseling before any other lender will extend you credit. This may well be a condition of the credit counseling agency anyways. After that, the thing that will help you out the most is re-establishing your credit as soon as possible. Both because that will build your credit score back up and because lenders might treat the credit counseling as some form of adverse item. They might treat it like one charged off account or they might treat all the accounts that they handled as charge offs. But, they'll still make an exception if everything else looks stable (job time, time at residence, debt-to-income, etc) and you've re-established credit since that event.

This will likely mean taking our a secured credit card after you're out of debt (unless you're able to keep one or more accounts open) and occasionally carrying a small balance so that you're credit report actually reports an on-time payment which it doesn't usually do if you just pay off the full balance.

That, and some time, will fix things for you within a few years.

As far as the snowball method, it works well but one thing to keep in mind is that if you do the math, you'll find that you'll pay less interest overall if you pay things off in order of highest to lowest interest rate rather than smallest payment or balance. Sometimes it will help your cash-flow (and your ego) to knock off a small balance with high payment account first just to get yourself some breathing room. It's a minor detail though and there is really no wrong way to do it.
posted by VTX at 12:52 PM on June 22, 2014 [1 favorite]

I know individuals (personally, these are not "friend of a friend" stories) who have gone this route and it was not effective. These companies are nearly unregulated. They can't back up their claims about reducing debt or interest rates. Their payment requirements are often onerous (one individual I know was forced to deliver a money order every month). Some are outright scams. I don't know anyone who went through one of these types of agencies and didn't regret it, honestly.

There is legitimate debt consolidation (but it depends on your ability to secure a separate line of credit through a bank or credit union which is often difficult if your income has been unstable and your debt is already high) and debt counseling. This is a decent overview of services and scams to be alert to. Lutheran Social Services does provide debt management and counseling so their advice on other providers must be considered in that context, but from everything I've read they're legitimate (I think they are in MN only however).

Minimum payments schedules are fine tuned to extract the maximum interest income from you over the longest possible period of time.
posted by nanojath at 1:52 PM on June 22, 2014 [1 favorite]

First, note that your income (and thus your debt-to-income ratio) has zero to do with your credit score. You are likely referring to / getting hit by the ratio of your balances to your limits, which will hurt you as much as a number of missed payments if you're maxed out.

Second, remember that any adverse activity on your credit report - including bankruptcy, and counseling / debt consolidation, will stick with you a lot longer than the three years it'll take to pay off your debt.

I would wonder whether the card companies would even willingly work with either you or a questionable consolidation firm when you are current on everything. It may be that the firm will stop paying altogether, letting you get 60-90 days behind, which will not only motivate the finance companies to work out a deal, but also destroy your credit. Are you willing to get that debt paid off in 3 years, only to have your credit rating end up the same as, or even worse, than it started before it gets better? A bankruptcy or 3 partial charge-offs are likely to immediately drop you well into the 500's for an extended period.

Even three years is a long time to assume you'll never have the need to have your credit pulled. You'd be surprised at how many places look at it. A former employer used to pull mine every 6 months, and once gave me the nth degree when a collection popped up.

Just carefully consider how likely it really is that in the next several years you'll apply for some form of new credit, look for new insurance, apply for a new job, need to finance a new car (what happens if your paid-for car gets smashed by a tree in a thunderstorm tomorrow? Do you have full coverage? If you do, have you considered dropping collision / comp to lower your insurance bill?).
posted by SquidLips at 8:58 PM on June 22, 2014

I think the "deal" you are being offered is too good to be true. After non-payment of 90 days the debts + penalties will be closer to $50,000 and you will have shut off all other options. The company is planning on charging you $26,000 pocketing $8,000 for their initial fee and leaving only $18,000 to pay off the three accounts that have only been delinquent a few months while the credit companies can see your other payments (car, mortgage) are up to date? Why would the credit companies believe you have no money to pay them? I suspect the contract they offer you guarantees their $8,000 payment right off the top, but not that the maximum you'll have to pay is $18,000. And once you've paid that $8,000 and ruined your credit rating and still owe $50,000+ who can you turn for help? Oh wait, you'll get some mail or a phone call offering you a loan at just-under the legally usurious rate.
posted by saucysault at 9:28 PM on June 22, 2014

Bankruptcy would be a better call, IMO.
posted by empath at 12:20 AM on June 23, 2014

I tend to agree on bankruptcy. Since the 2005 reform, note that you are required to undergo a consumer credit counseling evaluation (NOT debt consolidation) using an FTC-approved non-profit agency. This IS an option that may work for you, because the major creditors all like the idea of you paying your debt instead of NOT paying as would be wholly or partially true in a bankruptcy. As such you can get onerous interest rates reduced and the service will set you up with a maximum-five-year repayment plan.

If, however, there is no way that such a plan would pay off the debt, you will have no choice but bankruptcy. And really, it's not the end of the world, and many people who go through it find that they wish they had done so sooner.

But agreed, debt consolidation is basically a scam and you should avoid it. The great thing is that there are real options for you that do not involve signing over your money and your life (future). Bankruptcy exists for a reason -- a clean slate helps you and helps the economy. The world we would have if everyone were enslaved to their creditors for life would not be a better one.
posted by dhartung at 1:38 AM on June 23, 2014 [1 favorite]

I used CCCS (non profit credit counseling) to negotiate with the creditors, lower my interest rates, and handle payments. I still paid everything that was owed, and they will come up with a plan that will have you out of debt in 5 years or less.

I didn't have quite that much debt, but it was close, and I was totally paid off within about 3 years. They really lowered some of my interest rates a LOT - others weren't as negotiable.

I think if you get any sort of break on principal, you're running the risk of being 1099'd. Obviously paying taxes on debt that is forgiven is still less than the debt that was forgiven, but something to keep in mind.

I loathe the "snowball" method because it is mathematically unsound. I am happy that Ramsey helps people get out of debt, but the snowball method ignores interest rates.. and when you're talking about thousands and thousands of dollars, this could be very costly.
posted by getawaysticks at 8:26 AM on June 23, 2014 [1 favorite]

I used Greenpath, at the recommendation of my boss. He and I were at the exact opposite of the scale of amounts owed. I was in debt in the amount of about $25000 and he had about $250,000 in credit card debt that was renegotiated. I really really recommend that you take a look at their website and chat with them before going the debt consolidation route. They can explain why debt consolidation is problematic. They'll help you decide whether bankruptcy is appropriate and cost effective, and they really do make it simple. I will be through with my program in September, about 10 months after I started. My boss is still in his program but will have finished in less than 5 years. We're both incredibly satisfied with them.
posted by janey47 at 9:43 AM on June 23, 2014

In late to say this: I agree with those supporting the snowball method. It works.

Having said that, you should look into a consumer credit counseling service, not a debt consolidation service. Using a credit counseling service, my wife and I paid off about $40,000 in four years while having two kids and crappy jobs. It CAN be done, but those services that advertise on the radio and internet aren't the right ones.

But don't take my word for it: take his.
posted by tacodave at 4:15 PM on June 23, 2014

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