I want to say that if you are going to go to a non-profit Debt Counselor, take your calculator so you can run the numbers yourself.

I recently had a lady that has $50,000 in credit card debt, about 10 of them were Store Cards and 1 was a Discover card.  She went to the non-profit Debt Counseling company and was given a quote of getting out of debt in 32 months paying $1400 per month with the average interest rate of 9% per card.

The math makes it impossible – $1400 a month times 32 months = $44,800!

INTEREST RATES IN DEPARTMENT STORES

It gets worse.  Most department stores will not participate in the non-profit program, meaning, they will not reduce their already high interest rates.  Discover card will not participate in the non-profit program, so whatever their interest rates are, they will not reduce them.

Most of the cards that this lady had were store cards!

So, the question is, why would they tell you that you would be able to pay off your debt at less than you owe when most of the cards (about 30% of the total debt) is in cards that will not participate in the non-profit program?

Because they want your business!

If you check out a non-profit company, take a calculator and do the math. Then, verify which cards the non-profit company will be able to work with to lower the interest  rates.

We all want to believe someone that seems to make things easier for us.  But, when you LOOK, then you will know for sure.

In truth, the Credit Counselors (non-profit company) work for the banks and credit card companies to collect money for them. In a show of appreciation, the banks and credit card companies give back 8% of what they receive from the Credit Counseling companies.

Of course, that 8% return acts as a donation for the credit card companies and the banks who are able to then “write it off” from their taxes.

BANKS AND CREDIT CARD COMPANIES

When it comes to “negotiating” a lower interest rate with the banks and credit card companies, well, that’s another one of those ideas.  In truth, the banks and credit card companies tell the non-profit companies how much the interest rate will be.  There is no negotiation between the non-profit company and the bank.  None.

At one point, the banks and credit card companies shared their software with the non-profit companies so that transactions that happen can go back and forth very easily.

Finally, very few of the collection companies will work with the Consumer Credit Counseling group as far as lowering payments or interest rates.  By the time the debt is sold to a collection company, those collection companies will not give a return of 8% to the non-profit companies, so there is little value to the non-profit company to work with the collection companies and vice versa.

In reality, the non-profit, Consumer Credit Counseling companies work for the people that pay them the most money – and that is not you – that’s the banks and credit card companies.  The non-profit companies work for that 8% return for collecting your money.  That 8% is a lot more than your $25 monthly payment, that’s for sure!

The Investigation of Debt Consolidation

With a 45% pay cut from the banks and credit card companies, the non-profit debt consolidation companies (consumer credit counseling companies) panicked and decided to come up

with ways to make up for the damaging pay cuts: 

1. The first month’s payment to the debt consolidation never went to the client’s creditors.  Instead, the debt consolidation company kept that first payment to help cover their overhead. 

Here’s an example, a person joins the non-profit debt consolidation company.  They are charged $35 a month as a fee to the debt consolidation company along with $600 that is to be distributed to the client’s creditors. 

However, in their first month, the $600 never goes to their creditors.  It is kept by the non-profit company to help handle their overhead! 

You don’t know because everyone is smiling, but for the next month, your creditors are calling you wondering why you haven’t paid them.  You explain that there is this non-profit company that you are working with and that they will pay you. 

Then, you call the debt consolidation company and tell them what is going on.  They explain that they are setting up your account and to have your creditors call you. 

Finally, your second month comes around and you pay your $35 fee and $600 that goes to your creditors.  This time, the $600 is distributed to your creditors and the heat from your creditors “goes away”. 

However, you are now a month behind and the monthly late fee applies – $35! 

That means that every month you will be late with the payment to your creditors that the non-profit debt consolidation company makes for you. 

What happens to your balances with your credit cards? 

They go up by the $35 late fee! 

So, that wasn’t a good idea for you, though some debt consolidation companies were able to meet their overhead. 

Wait until you see what else the non-profit companies did to try and handle their pay cut from the banks and credit card companies!

THE SENATE INVESTIGATION INTO THE NON-PROFIT CONSUMER COUNSELING PROGRAMS (PART 2)

The Investigation of Debt Consolidation Part 2

THE SENATE INVESTIGATION INTO THE NON-PROFIT CONSUMER COUNSELING PROGRAMS (PART 1)

 Previously, I had mentioned that the banks and credit card companies were paying the non-profit consumer credit counseling companies 15% of what they collected.  Then, they reduced the amount to 8% and this caused the non-profit companies to search for a solution to their 45% pay cut. 

The first method was to take their new client’s first payment and not send it to their creditors, but to keep it to spend for their overhead.  This came up in a Senate Subcommittee investigation in the profiteering of the non-profit consumer credit counseling companies. 

However, there were more ways that the non-profit companies figured out to get money so they could make up for their pay cut from the banks and credit card companies.

The second way was this: 

2. Charge you a deposit fee that would “be returned to you when you completed the program”. 

Remember earlier I mentioned that the success rate of the non-profit companies was around 18%, or 1 out of 5 people completed the program and actually got out of debt? 

Well, the non-profit company would have their new client put down a deposit of, say, $500.  Since only 1 out of 5 complete the program, the non-profit company knows that the odds are in their favor that they will not have to pay that deposit back.  So, they just use the deposit for their overhead knowing that the chances of them having to pay it back is very low. 

There’s more, but remember, the problem the non-profit companies were trying to solve came from the actions of the banks and credit card companies – they cut the income of the non-profit companies by about 45%! 

Let’s take a look at how else the problem is solved.

THE SENATE INVESTIGATION INTO THE NON-PROFIT CONSUMER COUNSELING PROGRAMS (PART 3)

The Investigation of Debt Consolidation Part 3

THE SENATE INVESTIGATION INTO THE NON-PROFIT CONSUMER COUNSELING PROGRAMS (PART 1)

THE SENATE INVESTIGATION INTO THE NON-PROFIT CONSUMER COUNSELING PROGRAMS (PART 2)

What else did the non-profit debt collection companies do to make up for the 45% pay cut that was given to them by the banks and credit card companies? 

So far, they had kept the first payment the new client made and never distributed it to the client’s creditors (now outlawed in most of the states), they had you make a deposit that they would refund to you when you finished the program.  The only thing wrong with the refunded deposit is that only 1 out of 5 people ever finished the program, so the non-profit companies know they will end up keeping the deposit to use for their overhead. 

So what else did they do? 

They raised their monthly fee that you have to pay for their service.  This fee runs from about $25 to $75.  Raising the monthly fee simply means you pay more to get out of debt. 

It’s not the worst thing that has been done.  I think the worst one that still exists is this – the promise you will get out of debt in 4 to 5 years.  The non-profit companies advertise this on TV or the radio.  It’s really unbelievable that they just do it as if everyone will be able to get out in that time period. 

Here’s the catch – the representatives of the non-profit companies will meet with you and go over your financial situation with your creditors.  They tell you that they will work with the banks to try and drop your interest rates.  Here’s the truth no non-profit company ever negotiates the interest rates with the banks and credit card companies.  Never ever! 

Instead, the banks and credit card companies send to the non-profit companies what the interest rates will be each month. 

About 20 years ago, the interest rates at the non-profit companies were 4 and 5%.  Now, they run 9 to 10%.  It isn’t that the non-profit companies became bad negotiators and couldn’t get their way any more.  It was that the banks and credit card companies raised the interest rates they were willing to take. 

So, at 9 – 10% interest rates, how long do you really think it will take to get out of debt through the non-profit companies?  It’s 8 to 10 years!  

The profile of the person that gets through the non-profit program runs between $8,000 to $15,000 in debt.  That profile could get out of debt in 4 to 5 years. 

The rest of you that have much higher debt, it won’t happen in 4 to 5 years.  It goes up to 8 to 10 years.

In order for you to get out of debt in 8 to 10 years, you will need to pay more each month.  But, isn’t that the problem in the first place – you can’t afford the high payments? 

My advise is to check the numbers that you get from the non-profit company and see if it really adds up to getting out of debt in 4 to 5 years.  I had a guy in Texas once decide to go with the non-profit company.  He was in the Army and was going overseas so he wanted to set things up for himself. 

He and I went over the numbers he was given and he owed $23,000, the average interest rate was 9% and he had a Discover card that did not agree to lowering the interest rate.  Per the debt counseling program numbers, he was going to get out of debt in 4 ½ years and would only pay $2100 in interest on the $23,000 he owed. 

That was just impossible!  He realized it and decided not to do their program. 

So, check the numbers yourself and see if it really makes any sense.  Remember, the interest rate you are given still is a compounding interest rate, not a flat interest rate.