What to Do if You've Enrolled in a Debt Consolidation Company and You Now Want OUT!
Part of our debt consolidation company series
I received this letter and thought it would make a good subject for this site, as it's a question that I receive a lot.
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Hi,
My girlfriend made the terrible mistake of debt consolidation using Stellar Debt Solutions. I am now helping her out, and we are trying to figure out the best course of action from here and on. Before this, she paid everything on time, she was scammed in to the whole "lower you monthly debt with no interest." and being young and naive and trying to buy a car, she thought she was taking steps to reduce her debt and be accepted for car loan. Of course after reading your site, we know better. But where do we go from here.
Some questions:
- Do you know anything about Stellar Debt?
- It's been 10 months at $400 a month since she started, and we now faxed and emailed them to ask of status showing what they have done so far, and got no reply. Are they required to give us status on their negotiations or payments to creditors?
- How should we determine whether to stay in and continue paying $400 a month, or just DEMAND a refund and hope we get anything at all back from them, and then call the creditors to try and work out a plan with them?
- If we do decide to stop paying Stellar Debt, what do we do next? Being 10 months, I am sure that her credit is beyond repair and that we will be talking to collection agency and not the original creditors. Is it worth trying to even pay? Or is she better of just filing bankruptcy now that she is way in this mess?
- If you were her, and signed up with Stellar Debt, and paid $400 a month for last 10 months to them, and wanted to somehow repair this entire chaos, what steps would you take? (she is on a low teacher salary).
- If she decides to stick with Stellar (unless you strongly recommend
against it), should she keep paying the 19 payments of $400 left? Should she take any other steps?
We really do love your web site, it took hours to find the information, we wish GOOGLE would list you as number 1 for Debt Consolidation because you would help SO many people,
Thanks, a reader.
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My response:
First of all, lots of people are in your shoes, and there is hope! Here are some steps to help you assess the situation.
One of your question pertains to what is required of a debt consolidation company. Unfortunately, since they are a relatively new beast, debt consolidation companies are not regulated very well, having only state controls. Maryland or Florida have no controls at all, so be especially wary of companies who are based in these states. I don't know anything about the particular company you referenced, however, I looked them up and found them:
STELLAR DEBT SOLUTIONS
1800 Pembrook Dr., Suite 265
Orlando, Fl 32810
Uh oh. In other words, I doubt if they are required to do a thing and are largely unregulated...
1. Call your girlfriends creditors and find out how much money has actually been going towards paying down her accounts, how much is left to be paid and also, importantly, have they agreed to work with Stellar on your girlfriend's accounts? (You'd be surprised to find out how many creditors won't work with debt consolidation companies, and sometimes the Debt Consol companies conveniently forget to tell you that your credit card company would enroll in their "plans".)
2. You know how much has been paid - $400 x 10 months = $4000.
Do the current balances on your girlfriend's accounts reflect the amount of money which has been paid?
3. You said she has 19 months to go: $400 x 19 months = $7600. Is this amount close to what's left on her balances for her cards? (This is will help you figure out if the "plan" offered by the debt consol company is reasonable).
4. Pull her credit report. This will also help you figure out what's been going on on your girlfriends accounts as far as balances. But more importantly, it will show the impact on her credit. Things you don't want to happen to your credit no matter what:
- late payments
- accounts going to collections.
Have any of her credit cards gone to collections? Are they showing late?
Making Your Decision Now That You Have The Facts
If you feel that the accounts are not being paid down (she's already paid $4000 in payments - what happened to this money?), then I would make some decisions about what to do next.
1. Call the creditors and explain the situation and ask them if they have a program to put her on. Typically, the hardship programs offered by credit card companies to individuals are for a maximum of 12 months, but many are only 6 months.
2. If you decided to just pull out of the program - see if she can borrow enough to "catch up" on payments with her creditors, if they haven't gone to collections. Definitely inform the creditors that she's leaving the program and is going to start making the payment herself, otherwise they might just cancel her account. She'll take the credit hit if they are reporting her late, but that's better than the accounts going to collections.
3. If her debt is really being paid down and the 19 month plan looks doable, you might want to stick with the program. It does happen that things work out with such companies.
4. I don't recommend bankruptcy. The consequences of bankruptcy are severe and long term. If she finds herself too far on gone payments or balances, then I would just let the accounts go and deal with them when she has the money. It doesn't sound like she owes much money and most likely from what you said she doesn't really own anything and is therefore unlikely to be sued. But this should be your very last resort.
Update:I received further correspondence from the same reader about his girlfriend's situation:
Thank you very much for your response. My girlfriend spoke with Stellar Debt this morning. They were nice on the phone, but didn't have any good news. They said out of what she paid so far, $1887 went to pay their fees, and the rest was too little to negotiate anything. They insist she keep making payments so they have more to negotiate with.
Her debt is $20,000
We called Discover Card, and they already closed the account and sent it in to collection. I believe they sent it to NOC Attorney Network. Have you heard of them?
So now that they sent her money to collection, and Stellar Debt hasn't
indicates that NO money has yet been paid to any creditor and out of the
$4000 she paid only $1800 of it is in her account, what should she do?
If she does keep making $400 payments, is it likely that they will
negotiate her debt and take care of it? or is it possible that she will
end up with $1800 + $7600 = $9400 of her money taken by Stellar Debt, and
still be $20,000 in debt to the creditors?
If she does decide to pull out, what would you recommend she do to try to get as much money as possible from Stellar Debt back? Is she likely to get anything back?
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If I had a nickel for every time I've heard this one.
The above letter is a perfect example on how these guys operate and the dangers of these companies. Wow, this company earned $1887 for doing absolutely nothing but cashing the checks.
I responded:
OK, now I understand - they are a debt *negotiation* company. Scum bags. These companies will tell you that they are different than debt consolidation companies. They are mostly wrong and a little bit right. How they are right: debt consolidation companies tell you that you are making a donation to the company so they can "help" others out. The debt settlement/debt negotiation companies are up front about the fees they charge for their services and are not non profits. But they are wrong in that you will get taken for a ride with either type of company.
The main scheme used by debt settlement/debt negotiation companies:
- You will be paying your monthly minimum payments to the debt negotiation company, but they will not be paying your creditors, just putting the money into some kind of an "account."
- When the time is right (meaning your account is about to be charged off by the original creditor), they will take the money you have built up in your account and negotiate with the creditor to settle for this amount.
- In this way, they tell you, you will have paid off your account in six months or less and your credit will be fixed.
Sound good to you? Run for the hills, I say. There are some problems here.
First of all, what if the credit card company won't deal? What if the total of your minimum payments for an account is less than 10% of what you owe? Some credit card companies would rather take the tax write off then take so little money. In this case, the debt negotiation company takes their fee (remember, they are NOT nonprofit), your credit rating is ruined, your account is charged off and possibly in collections, and you have received no value for your money. What a deal!
The company is hoping that if they offer 50% to the credit card companies, they will take the money. Problems with this logic:
a) Most companies charge off your debt after 120-180 days, so having her take 24 months to collect enough money to settle is ludicrous. This hare-brained idea ensures that all of the accounts will go to collection. Her credit will be ruined.
b) The lowest I've heard that a credit card company will take is 50%. Usually, they'll say that any lower and the tax write off is more profitable and they won't deal.
c) Presumably, then the debt negotiation company will deal with the collection agencies. Wow, what tough work! This is something that is pretty easy for anyone to do, you don't need these guys handling it for you.
I advise that you pull out immediately, report these guys to the FTC and your state attorney general. Send them a certified letter demanding her money back, and make *sure* it shows that she is copying the FTC and your state attorney general. What does it say on her contract about early termination? She should at least be able to get her money out of her account, and then she can use the money to pay off some of her debts.
I wouldn't hesitate in going to court over this if need be to recover money and other damages. Here's a good place to find an attorney:
http://www.naca.net
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