Get out of debt ads: What's the catch?

Surely you’ve seen these ads on TV for consolidating or managing your debt. But, how do these companies work? How do they make a profit? And, if you go with their plan, are you forced to stop charging from that point onwards?

Also, do they have to approve all your purchases? Perhaps, just major purchases? Can you still treat yourself once in awhile, even if you pay with cash, to a small non-essential purchase?

Just thought I’d ask…the curiosity is killing me. Esp. should I ever be in need of their services, I can know ahead of time what I’m getting into! Thanks, Jinx

I suspect that a lot of the ads we see are for companies that are paying some of your debt for you, by loaning you money at high interest rates. Or they involve you declaring bankruptcy.

Genuine credit counseling is available to those who need it for free. So if you’re ever in need of such services, do NOT call some number you see in a TV commercial. Instead, look for a member of the National Foundation for Credit Counseling (http://www.nfcc.org/).

Some of these companies (the debt management ones, not the consolidators) are funded by creditors, like credit card companies. They’d rather have you get your debt problem under control, and start making regular payments, than have you declare bankruptcy and stick them with the loss.

The dangerous debt-consolidation schemes, however, involve putting a second (or third) mortgage on your house, and using the proceeds to pay off other debts. The danger is that you will turn around, run up your credit cards again, and then default on the second mortgage. So, instead of having a lot of debts, you now have a lot of debts and no home.

As far as I know, neither type of company takes control of your spending. The debt management types offer counseling, and work with your creditors to come up with payment plans. The for-profit consolidators, of course, are now holding a mortgage on your house. They’re not going to spend time holding your hand - if you don’t pay on time, they’ll just foreclose on you.

I don’t know for certain but they might. Not so much that they can control your spending but as part of your consolidation scheme you may be required to cancel some of your credit cards. While it doesn’t prevent you from opening new ones it is a shot at forcing yu to reign in your spending. I know a bank forced a friend of mine to do this before he got a mortgage.

Just be sure never to deal with any “credit counseling” company that tries to get you to use a fake Social Security number.

As far as debt consolidation goes, be extremely cautious in dealing with subprime mortgage refinance companies. Here’s some information on a couple of the real bad guys in this business:

http://www.dfi.wa.gov/hfc_online_nr.htm

From what I’ve heard (from my parents, who had a good deal of credit card debt to deal with), those credit counselors aren’t the way to go if you have any equity at all. They will lower your payments by negotiating with your creditors and get you out of debt, but this process will be all over your credit report. It’s pretty tough to get another line of credit after that.

My folks took the 2nd mortgage route, and it worked like a charm.

Hint:

If you use a mortgage loan to pay off student loans, credit cards, other personal loans, you are turning unsecured debt into secured debt - NEVER do that. If worse comes to worse, you can default on unsecured debt - your credit rating will be destroyed, but you’ll have the house.
If you default on the mortgage you got to pay off the unsecured debt(s), you can’t default without losing the house.

just a small hint from a voice of financial anarchy :wink:

Quite true. One of the more common equity stripping tricks is to get someone started with unsecured consumer debt, then convince them to refi with a mortgage. That’s why certain subprime lenders love to send those “loan checks” in the mail, with inadequate disclosures of the true terms of credit. People get tricked into unconscionable APRs and fees on these consumer loans and are then led to believe that the only way out is to sign on for a mortgage refi.