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by stopdock on April 4th, 2007

stopdock

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What good is doing a debt-consolidation, when all the credit card companies hire their own law offices to sue you for the debt for each credit card?

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  • by Anonymous on April 4th, 2007

    Anonymous

    when you consolidate your debt, you take all your seperate debts and turn them into one debt. Therefore you have only to pay ONE payment, which is applied to the new total amount of the debt. Debt consolidation agencies deal with the collection agencies and work out an agreement to transfer the debt to the consolidation agency, who then collects payment on the debt. Once your debt has been transferred to a consolidation agency, it's no longer in the hands of those collection agencies and lawyers hired by the credit card companies.

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  • by Anonymous on July 8th, 2008

    Anonymous

    Based on your question, it appears you misunderstand what debt consolidation is, or you have been offered something that is not, in fact, debt consolidation.

    Debt Consolidation is where you pull out a new loan to pay off two or more other loans. This is usually not possible for insolvent people because no creditor will give you a loan (unless you have collateral to secure the loan). Debt Consolidation provide numerous benefits: 1) it allows you to only write one check each month, 2) it allows you to only have one payment due date each month, 3) it saves on multiple postage, and 4) it often allows you to lower your interest rate. With Debt Consolidation, you complete performance on your current loans, and create a new contract for the consolidation loan. Thus, there is nothing for the credit card companies to sue over because they all got paid.

    If you do a Google search for "debt consolidation," you will find numerous companies advertising "debt consolidation," but NOT actually providing debt consolidation. These companies are actually offering a "payment consolidation" service or a "debt negotiation and settlement" service (which is often called "Credit Counseling").

    Payment consolidation is a service in which a company will calculate the monthly cost of all of your loans, and allow you to pay all your loans with one check directly to the payment consolidation company. The company will then pay your bills on their due date. This gives you all the benefits of debt consolidation (except the lower interest rate). However, in this arrangement, you are NOT completing performance on any of your loans. Thus, if you ever fail to pay, each individual credit card company will go after you. Credit card companies have no say in this arrangement because they are getting paid according to the terms of the credit agreement.

    I suspect your question really has to do with "debt negotiation and settlement" (i.e. credit counseling). Here, you have a company that collects a monthly payment (just like the payment consolidation describe above), but in addition they negotiate with the credit card companies for more favorable terms. The more favorable terms could be just a lower monthly payment, but most often is a lowering (or the elimination) of interest, and/or a lowering in the principle balance of the debt.

    Why would a credit card company agree to this? The simple answer is: IT IS MORE PROFITABLE FOR THEM TO DO THIS. A credit card is an unsecured loan. Thus, unlike a mortgage or car loan, if you default, there is nothing for them to really go after. So if you default on a credit card, the company can certainly sue and will probably win. However, a judgment is nothing more than a piece of paper. If someone cannot afford to pay their credit card bill, it is unlikely that you will ever collect on that judgment. On the other hand, if the credit card company agrees to lower the debt in exchange for your continued voluntary payments, the credit company will usually collect more of the debt.

    For example, suppose you owe $10,000 on a card, and you default. The credit card company could send you to collections and sue, in which case the law firm/debt collector will keep 40-65% of the debt actually collected. Thus, the maximum the credit card company will recover is $4500-$6000 of that $10,000 debt. However, this assumes that 1) you don’t file for bankruptcy, and 2) the debt collector is able to collect 100% of the debt. However, many debtors do file for bankruptcy (which could prevent collection all together), and it is hard to find assets for an insolvent debtor, which usually means that the debt collector will never collect 100%.

    Debt collectors usually only collect about 20% of credit card defaults, which means the credit card company should expect to recover only $700-800 on the original $10,000 debt if they have to send the default to collections. On the other hand, if you use credit counseling, the counselor may negotiate a 50% reduction in your balance, which means the credit company will now recover $5,000 of the $10,000, as opposed to only $700-800.

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  • by Anonymous on July 8th, 2008

    Anonymous

    With debt consolidation, you PAY OFF all of your debts. Thus, there is nothing for the separate credit card companies to sue you over.

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  • by Biz on February 23rd, 2009

    Biz

    You may get some articles regarding the positive side of debt consolidation from
    http://debtcons.freehostia.com

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  • by stopdock on April 4th, 2007

    stopdock

    so when the credit cards, law firm that they handed off this to... calls, and i tell them i have done a debt-consolidation. They than tell me they don't deal with third parties and they plan to sue me.... this is confusing, who's lying?

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