Debt Consolidation and Debt Management Plans

Many of our clients facing serious debt problems have first looked to Debt Consolidation or Debt Management Plans.  In many cases, our clients have tried to meet their obligations to their creditors to their own detriment only to be find themselves mislead by promises of “debt consolidators” or “debt management plans” who charge high fees and never really address their underlying debt issues.

Debt consolidation or debt management plans entail taking out one loan to pay off many others. In recent years, reports in the media have raised concerns about the use of consolidation loans.  The worry is that many people are tempted to consolidate unsecured debt into secured debt, sometimes secured against their home, sometimes making payments for months and years only to be subjected to continued creditor harassment and lawsuits. Although the monthly payments may often be lower, the total amount repaid is often significantly higher due to the long period of the loan. Debt consolidation sometimes only treats the symptoms of debt and does not address the root problem.

PROBLEMS

Before considering debt consolidation, consult with an experienced New Jersey Bankruptcy attorney to at least learn your rights under Chapter 7 and Chapter 13 of the bankruptcy code.   Do not rely on your own understanding or misleading advice of well-meaning family and friends.  Most times, clients are wholly unaware of the protections and benefits of the Bankruptcy Code and the limitations, pitfalls, and costs of debt consolidation.

• Beware of companies that pressure you into a plan or make any guarantees without looking into your specific needs.
• Research the company and the services it offers. It is better if it offers a wide range of options and education on how to handle debt. (It also can’t hurt to look up companies on the Better Business Bureau.)
• Contact your creditors and ask them if they will work with the company.
• Read the fine print: Make sure to review the agreement closely, ensuring that it outlines the finance company’s plans and its timeframe.
• Before you start paying the finance company, ensure that your creditors have accepted the company’s proposed plan. Until they do, be sure to continue paying your bills as usual.
• After you begin the program, keep a close watch on your statements and call the creditors to ensure they receive payments.
• Although they aren’t exactly scamming you, many finance companies simply don’t warn you about the excessive fees they charge. These fees can add up so that you pile on even more debt. In a related article on debt settlement, SmartMoney writer Aleksandra Todorova named a few fees to watch out for:
• A portion of the total debt (which could be up to 18%)
• A portion of the amount you save (which can be around 25%)
• Sign-up fees
• Monthly fees (both service charges and flat fees)
• The FTC also cautions against companies that pressure you to pay “voluntary fees.” One company that the FTC exposed, called AmeriDebt Inc. collected about $200 million in hidden costs like these [source: Federal Trade Commission].