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How to Get Out of a Debt Consolidation Program

Last Updated: March 11, 2011

People still write me at least once a week telling me of their horror stories with debt consolidation companies like - Ameridebt (now out of business), Cambridge Credit Counseling (now out of business), and all of the debt settlement and debt negotiation companies which have sprang up in recent years.

There is lots of news on how "bad" these programs are, but not much advice on getting out of one. Here is the typical comment I receive about these guys:

What to Watch Out For

Be wary of organizations that:

• Charge high up-front or monthly fees for enrolling in credit counseling or a Debt Management Program (DMP).
• Pressure you to make “voluntary contributions,” another name for fees.
• Won’t send you free information about the services they provide without requiring you to provide personal financial information, such as credit card account numbers, and balances.
• Try to enroll you in a DMP without spending time reviewing your financial situation.
• Offer to enroll you in a DMP without teaching you budgeting and money management skills.
• Demand that you make payments into a DMP before your creditors have accepted you into the program.

What to Check Before Engaging in a Debt Management Program

If you suspect that your debt management/debt settlement company may not be delivering on their promises, check your bills to make sure that the organization fulfills its promises as far as the monthy fees and any money being taken out of your checking accounts. If you are paying through a Debt Management/Debt Settlement Program, contact your creditors and confirm that they have accepted the proposed plan before you send any payments to the organization handling your DMP.

What if the Debt Management/Debt Settlement Has Gone Out of Business?

What happens to your debt management/debt settlement program if the company that managed your debts shuts down? A counseling agency that is going out of business may send you a notice telling you that your DMP is being transferred to another company. Or it may tell you that you need to take some action to keep your financial recovery on track. If a government agency has filed an action against your debt management/debt settlement company, you may get a notice from a third party. If you discover that the organization handling your debt management is going out of business you need to:

1. Contact your bank to stop payment if you are making your payments through automatic withdrawal.
2. Start paying your bills directly to your creditors.
3. Notify your creditors that the organization handling your debt is going out of business. Consider working out a payment plan with your creditors yourself. Ask if they will give you a reduction on your interest rate.
4. Order a copy of your credit report. Check for late payments — or missed DMP payments — that may result from the company going out of business. If you see "late" notations you don’t expect, call the creditor immediately and ask that the notation be removed. Understand that they have no obligation to do it.

If payments are late because the organization handling your debt management has failed to make scheduled payments, the consequences can be just as devastating as if you failed to make payments to the DMP. If you do not act quickly to make arrangements with your creditors, you could incur late charges that increase your debt, lose the lower interest rates associated with the settlement, and have "late" marks on your credit report.

The other thing I would do is immediately pull out of the program and contact your existing creditors and see if you can work out a plan with them to make payments on your own in one of their hardship programs. If you do not act quickly to make arrangements with your creditors, you could incur late charges that increase your debt, lose the lower interest rates associated with the settlement, and have "late" marks on your credit report.

Getting Your Money Back

Unfortunately, most people don't read the fine print on the contracts with the DMP companies. According to this blog post, http://creditchoices.net/wordpress/2008/04/confessions-of-a-debt-settlement-company-worker/:

"The contract actually states that the company is not responsible for any negative repercussions due to their enrollment in our program. It also stated we could cancel a client without refund at any time (which happened a few times in a year), and that if a client cancelled we were still due our year's worth of fees no matter what. Money that we were practically guaranteed because we drafted directly from the client's checking accounts. No person in their right mind would sign this contract if they understood what it meant."

Even if your credit report doesn't have such scurrilous language, you may still have to threaten the DMP with legal action, reporting them to your local attorney general's office, the FTC, or the Better Business Bureau.

Fixing the Damage to Your Credit Report

Once you have negotiated with your creditors, you can begin the process of credit repair. For details on how to do this: http://www.creditinfocenter.com/repair.

I would also try to see if you can find a lawyer that might take on your case (they may also know of class action lawsuits which are currently in progress against your DMP Company): www.naca.net

Lastly, to help you negotiate with your creditors, you can also order our "How to Settle Your Debts" ebook for some more tips on talking to your creditors.

Good luck to you, and don't do bankruptcy. You can get through this.

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