Loaded with debt? Looking for a resolution before you declare bankruptcy? Many people look to debt resolution companies for help when they find themselves in this position.
Unfortunately, people in this position are often only delaying the inevitable. For many, involvement with for-profit debt resolution companies ends up with depressed credit scores, continued debt and ultimately bankruptcy delayed.
How for-profit debt resolution companies work
The business model is simple: People who have a mountain of debt – and for the most part it’s consumer debt – enter into an agreement with the company to take care of the debt.
Here’s the key: The company opens an escrow account into which the debtor starts making payments. The debtor stops making payments on the debt. The company goes to the creditors and convinces them that they should accept less than the amount owed or the debtor will declare bankruptcy and the creditor will get next to nothing on the debt.
In an ideal world, the creditors all agree to accept less than what they are owed. The company arranges a payment schedule and makes the payments out of the escrow account. After each creditor is paid off, the company takes a payment at profit. In three to five years, the bills are paid, the company has turned a profit and everyone is happy.
But it’s not a perfect world
Nope, it’s not a perfect world. The first problem with working with a debt resolution company is that you stop making any kind of payment on your debts and start making payments into an escrow account. Your creditors take a dim view of no longer getting paid and report the non-payments to the credit-scoring agencies which then drop your credit score.
Now you’re late on your payments and your credit score is dropping like a rock. But things will be OK when the creditors agree to the terms the company negotiates, right?
Here’s the thing: The creditors don’t need to agree to the new payment amount or schedule. They can insist on the old payment amount or schedule. And while this negotiation goes on, you are falling faster and further into debt.
Creditors with secure credit – a mortgage company that can take your house or an auto loan company that can take your car – don’t have much of an incentive to renegotiate the terms of a loan. They can just repossess your property. Student loan companies don’t have much of an incentive to renegotiate loans either since federal student loans are protected from Chapter 7 bankruptcy. Utility companies don’t have much of an incentive to renegotiate because they will either get paid or discontinue service.
Which means these companies usually deal with credit card debt, and while credit card companies want you to pay for their services, they make a lot of money charging customers interest and late fees. When you pay into an escrow account and not to the credit card, you are increasing the interest and late fees they charge to your bill. It makes a bad situation worse.
This is why many people who go to debt resolution companies usually end up talking to a lawyer about bankruptcy protection, only they do so several years later.
If you or a loved one is having trouble with mounting debt, there are non-profit credit counseling professionals available who can help you get your payments under control. If this doesn’t work, talk to an experienced, qualified attorney about your next actions.