Financial Contrarian #5: Debt Predators and Quick Fixes

Circling Sharks

When you’re in crisis, you dream of a savior. This makes you vulnerable because predators sense it. They know they can prey on you in your time of desperation, the proverbial “wolf in sheep’s clothing.” There aren’t many forms of life lower than those would do this, but they’re out there.

Folks in crisis also tend to panic and look for a quick fix, which can be problematic. They have often gotten into their situation due to impulsive decisions, and end up making it worse with even more. You can’t dig your way out of a hole. You’ve got to climb out, often with help.

Dealing with debt isn’t easy, but it can be simple. It’s like dieting—people become so desperate to lose weight they throw money and time at every fad that comes along, hoping it will be the magical cure. Here’s a bonus for you. I’ll tell you my real magical way to lose weight. It works, guaranteed, and it’s free! Get on the scale several times a week. If the number is above the weight you desire, eat less and exercise more. (Okay, that’s an oversimplification, but it works!)

To get back to the matter at hand, this blog post will explore some common scams that those who are looking for financial help are exposed to. We’ll also examine some quick fixes that seem like good ideas but really aren’t.

Debt Settlement Companies

Debt settlement companies will offer to negotiate and “settle” your debt for less than you owe. They’ll tell you to stop payments to your creditors and ask you to give them a sum of money. They’ll take a hefty fee for themselves and set up monthly payments from you, then sit back and let your debts go unpaid. Their approach is often to wait until the creditors send the debts to collections, or sell the debt off for pennies on the dollar. Then they try to negotiate for a lower settlement amount. Meanwhile, collectors are nagging you, your credit rating is being destroyed, penalties and interest are piling up, and you may be sued by your creditors. The company may well go out of business or disappear. It’s very likely that the amount you give them will be insufficient to settle the debt, and the situation becomes worse and worse. This type of company is illegal in many states.

Debt Elimination or Termination

Debt elimination or termination companies are often scammers that will offer to “get rid” of your debt using great-sounding techniques such as “bond for discharge of debt,” “declaration of voidance,” or redemption certificates. If it were this easy, nobody would have debt! These are scams, run away. Only chapter seven bankruptcy can make your debt go away, and it’s a long, difficult process. We’ll talk more about it later.

Credit Score Repair

This “service” is also rife with scam artists. They’ll promise to boost your credit score and they might just do that—at a cost and temporarily. After charging you some money, what they do is challenge every single item on your credit report. Under law, once challenged those items must be removed for a short period of time so that you have the opportunity to provide proof. During that time, your score will go up. However, if you don’t provide that proof, the items return to your report and your score goes right back to where it was. By then, the “credit repair” folks are long gone with your money. If there are inaccurate items on your credit report, you can challenge them yourself, for free.

Debt Consolidation

Debt consolidation can work in some cases, but be careful. For example, if you consolidate federal student loans into something else, you’ll lose some of the benefits and protections from those federal loans. If you roll unsecured debt such as credit cards or medical into a secured loan (such as a second mortgage/HELOC) you now have unnecessarily put your assets at risk.

Definitely don’t be sucked in by the lure of stretching our your payments years into the future just for a lower monthly payment. This is not fixing the problem. You’re setting yourself up to be broke for a whole lot longer. Debt consolidation can work in situations where you’re taking high-interest loans and rolling them into a lower interest obligation. But stay gazelle-intense and keep the term of the new loan as short as possible.

Home Refinance/HELOC

As with Debt Consolidation, tread carefully here. Don’t take out second mortgage or HELOC loans to pay your debt. To do so means you are now providing the capability for your debtors to come after your home! If you’re refinancing your primary mortgage, as with the advice on debt consolidation, don’t do it in such a way that you stretch out your indebtedness. Dropping two percentage points on the interest rate is fantastic, but use the opportunity to shorten, not lengthen your loan period if you can. Don’t go through this process and incur the costs for small differences in the interest rate.

Bankruptcy

Bankruptcy attorneys all too commonly represent bankruptcy as a quick fix or cure-all for debt problems. It should always be a means of last resort. The effect on your life is long-lasting and not pleasant. If you’re looking for chapter seven, where certain debts are liquidated, you first have to pass a means test. It’s test as to whether you have an ability to pay. Often, just having a job will cause you to fail this means test. That means you have to do chapter thirteen, which is a structured repayment plan. That’s right—you still have to repay your debts, plus the attorney!

Certain types of debt aren’t even bankruptible—student loans, IRS, criminal fines/restitution, alimony/child support. Bankruptcy is a long and expensive process. It should be a last-gasp solution but sometimes is the only option. Enlist the help of an ethical financial coach before taking this step.

Payday Loans

Payday loans are among the most predatory quick fixes for those in debt trouble. To get the “loan,” you must write a post-dated check or provide electronic access to your account at some future date. The amount you pay is the total of the loan plus the fee that the lender is charging you. The lenders are counting on you not being able to repay on the designated date, in which case you get caught in a downward spiral of worsening debt. The interest rates on these are often in the high triple-digits. They’re a cancer on your financial life and illegal in some states for that reason. Avoid payday loans at all costs, no matter how sure you are that you can repay on time.

Zero-Interest Credit Cards

Please don’t get caught in the zero-interest points/miles credit-card shuffle/merry-go-round! See the prior post I’m Calling BS on Your CCs for my extended thoughts on this lure. Credit cards are the most heavily marketed products out there. The banks use armies of very talented mathematicians and marketers to make sure the deals are always skewed heavily in their favor. They know you’ll spend far more with the lure of points, miles, and zero interest and you’ll end up paying heavily.

That said, some folks will bail themselves out of high-interest rate cards by transferring to a new zero-rate card to buy themselves some breathing room. The card companies are banking (literally) on the fact that in most cases, folks won’t pay the new card off by the time the grace period ends, and then whack them with even higher rates. Don’t ever do this unless you’re absolutely sure you can pull it off. It’s a gamble.

Retirement Savings/401k Loans

Another place people look to bail themselves out is their retirement funds. This is another bad idea that does long-term damage to your financial health, particularly if you’re young. Those dollars invested in your early days are the ones that compound into big bucks later.

This includes 401k loans—a very dangerous route to go. If you suddenly lose your job, guess what—the loan is due. Also, while you have that money out of the account, it’s not growing for your retirement. Don’t set yourself back this way! Would you rather eat Ramen noodles now or Alpo in your retirement years?
The standard advice is to never touch your retirement savings unless it’s to stave off bankruptcy or foreclosure, and there are no other viable alternatives.

Recommendations

So, with those options off the table, what’s left? Follow the plan that works—the one with a proven track record of success. Sign up for a local Financial Peace University course (or take the online one), get to the library and read Dave Ramsey’s Total Money Makeover, or find a good, ethical financial coach.

Healing debt problems is like dieting. The solutions aren’t complicated. The quick fixes are scams, traps, and minefields. It takes a solid plan, dedication, and persistence to succeed.

If you need help, reach out to us at Money Coach Group. We have new, inexpensive plans that don’t lock you into anything and we never try to sell you any products. Maybe we’re that savior you’ve been dreaming about. We’d love to help you down the path to BE. DEBT. FREE!