Is Consolidating Debt A Good Idea?

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I wanted to talk to you this month about something that has nothing to do with personal injury action or workers compensation. I want to talk to you about credit companies, debt collectors and debt consolidation groups.

As a personal injury and workers compensation lawyer in Belleville, IL, I have several clients who as a result of a personal injury case or workers compensation case have accrued multiple debts or have gotten behind on bills and some of the bills that they’ve accumulated they can’t afford to pay anymore are credit card bills.

On occasion, they turn to some of these debt collection companies or debt management groups that offer to come in and collect all your credit cards and then negotiate those bills down to get them paid off more quickly for the person paying for the service. This will help a client clear the slate of their debt, avoid high interest rates and protect their credit score.

The idea is that they pull all your debts into a single account, you pay them a certain amount in the form of a monthly payment on a monthly bill and then they distribute the funds to the credit card companies to settle your lines of credit and take care of all your bills. Sounds like they’re just being nice folks. The fact of the matter is that even in the best of cases, this is not a very good deal for you. In fact, they’re not doing anything that you probably couldn’t do on your own.

Let me explain an example of the problems that people commonly run into with debt consolidation loans or companies. The gentleman in this example, a friend of mine, called me and said that he and his wife had accumulated thousands of dollars in credit card debt. The credit card debt amounted to about twenty five thousand dollars. The situation was that to deal with all of these different credit cards (there were about 10 of them) he contacted a debt consolidation or debt management group to take over payment of all those credit cards.

He agreed to the loan terms to pay the debt consolidation company almost eight hundred dollars a month. He signed a contract with them. The contract specified that he would pay them the amount over a 36 month period. The consolidation group listed out all of the bills that they were going to pay. There were about 10 different credit cards. At the very end of that 36 months the debt consolidation group came back to him and said: “You need to pay us more money because we didn’t have enough money from you to pay off all of these credit cards.”

Now you can do the math 36 months at $800 a month comes to a pretty sizable amount of money that they had already received from this person.

The Dangers of Debt Consolidation

Let’s look at how these debt management companies run their business. First, they contact your credit card company, and if you owe them three thousand dollars they say: Hey we’re debt consolidation group how about if you accept fifteen hundred dollars? We’ll pay you off now, otherwise you’re not going to be able to get any money from the person that you’ve extended the credit to.

They then do that for all the credit cards they agreed to pay off for you. And they did that for this gentleman, but guess what, they left one out.

One credit card company they somehow missed. They did not even contact them and didn’t try to negotiate the balance. That balance was at the time eighteen hundred dollars. This credit card balance went unpaid and developed into twenty three hundred dollars and after my client decided he wasn’t going to extend the 36 month agreement and was not going to continue to pay eight hundred dollars a month for another 36 months. (The agreement they offered him to take care of the last card.)

The credit card company sued him. They sued him for the balance of twenty three hundred dollars because the debt group didn’t consolidate it didn’t do anything to take care of it. The gentleman ended up getting sued by one credit card company anyway. Yes they did pay off his debts, but when I did the math to try to figure out exactly what the debt consolidation group got paid versus what he would have had to pay on his credit cards he was about two thousand dollars less in what he paid the debt management group or debt consolidation group than he would have if he would have paid off all of his credit cards himself.

My point is that these companies, these debt consolidation groups, are out there to get your money. You need to be very careful. You most certainly will end up still paying more that you might if you just handle the negotiations concerning repayment terms yourself and you might end up hurting your credit in the end.

This debt consolidation group’s contract also has a clause in it that he was forbidden from filing a class action lawsuit against them, forbidden from filing a lawsuit against them and it even had an arbitration clause that for him to be able to pursue arbitration to resolve any dispute with the debt consolidation group he would have to pay a thousand dollars. They know that if you just went through some issues with your credit you sure enough wouldn’t be able to pay another thousand dollars to fight their unfair business practices.

I ended up helping my friend out and getting things worked out for him with a lot of threats to the debt consolidation group. So what I’m telling you is before you go to these debt consolidation groups, I would suggest that you alone contact your credit card companies to see what you can work out with them. Maybe they will stop the interest from accruing. Maybe they will agree to a lower balance.

But in the end you will save yourself from being taken advantage of from a debt consolidation group. The other thing I want to caution you to do regarding these businesses is to carefully read your contract with them very closely. Had this client continued to pay eight hundred dollars more without knowing what credit card hadn’t been paid and without knowing the balance still owed,  he would have signed up to pay them another eight hundred dollars a month for another 36 months. He would have paid them about twice what his credit card debt initially was.

My point being, you have to be careful and if you do run into an issue where a credit consolidation group or credit card company is harassing you or

you think they’re not playing fair then you need to consider fighting back. There are rules that these credit companies have to abide by and if they don’t they can be sued. You have some legal rights.

I don’t do that kind of work but I do know lawyers that handle class action lawsuits for people. A class action suit is one in which  a group of people file suit together. This applies in this case, because you can bet that if these credit card consolidation companies are doing it to you, they’re probably doing it to a hundred other people. And while it might be $500 that they’re cheating you out of or might just be your aggravation and you don’t think it’s that big of a deal

the only way that these companies are going to be able to stop this stuff is if people pursue their rights and don’t get taken advantage of. And that might necessitate calling an attorney. If you would like to discuss your case with us, call us at: (618) 239-6070