We’ve all seen 'em - ads that will help you reduce or consolidate your debts by working with “XXX Company.” Some of the testimonials claim to cut their monthly payments in half, or work with debtors to defer some of their debt. How the heck can that work? I mean, if ya got bills, ya gotta pay 'em… don’t ya?
I think they work by replacing all of the little credit card bills with high interest rates with one big loan with a better interest rate.
Or . . . They can increase the interest rate. If they make the term of the loan long enough, your monthly payment would be less. But that would be a debt-reduction scam.
As I understand it there are two methods. Either a loan that covers all your debt that you pay off. This reduces your payments because it has a lower interest than the average of your debts, and/or a longer payment period.
I suspect most go with the standard loan-level interest rate over a longer period to get the reductions quoted, while this isn’t a scam – the longer period is in the small print somewhere – I doubt they’re terribly upfront about it all.
If your credit is decent and you’re earning money you should be able to source a loan for yourself direct from a bank, and cut out the middleman.
The other method is debt management, here they phone all the people you owe money to and negotiate different payment schemes. You pay the management company money and they in turn pay off the debts in a way that keeps everyone happy. They also take a cut for this service.
This isn’t anything you couldn’t sort out yourself either, most companies are quite receptive to changing payment schedules. It meas they’ll get the money eventually rather than not at all, or have to go to the trouble of collection agencies.
In the second case you’re trusting the company not to piss off any of those people, it’s still your credit rating that takes the hit if they miss payments etc.
I should point out that I’m not an expert or even remotely connected to this field, this is just how I understand it. I suspect some of these companies are borderline scam and the amount of them about indicates there is clearly money to be made.
Some of these places will call the creditors and say you may have to file for bankruptcy if they continue to harass you in which case they presumably would get nothing. The company person then suggests a partial payment to settle the (usually very large) debt and the creditor company will take it. Since they have affectively established a new contract at that point, it is my understanding they don’t put it on your credit report either, though this is just what I’ve heard and cannot verify it.
I do have a friend who got in a car accident with no insurance and managed to amass some heavy medical bills as a result. He did this (i.e. told the MRI place that wanted $5,000 that he could only pay them $500) and tells me that it worked, though I confess I cannot verify what his credit report looks like.
Debt management organizations do the following:
Combine all credit card (etc.) payments into one single monthly payment, reducing the confusion/labor for the debtor
Negotiate with credit card companies to reduce rates (thereby lowering monthly payments) and forego any penalty finance charges (overlimit fees, late fees–which, since your pmts. now go through the agency at a specific time ea. month, should never come up again anyway)
Give the credit card companies some hope that they will get their money back. After all, if the debtor has gone to the extent of signing up with one of these organizations for a structured, multi-year payback plan, it indicates that they’re somewhat committed to making good on their debt.
While others have mentioned that you could, in theory, do all of the rate negotiation, etc., yourself, the fact is that if you’re considering joining up with a debt management program you’re usually waaaay past that point. The whole reason to join, in fact, is generally because you’ve thus far been unable to manage your spending and payments on your own, and need some help.
It should also be noted that enlisting in a debt-management program generally means the end of all of your current credit accounts. i.e., your current credit cards become inactive, and all you’re doing is trying to pay them off completely, at which point your accounts will be closed. So don’t expect to have the use of any of those credit cards again. (It is, of course, possible to open new credit card accounts, though that always depends on your credit rating.)