Mountain Mortgage Guy: Beware of debt-relief companies that will ruin your credit (column) | VailDaily.com

Mountain Mortgage Guy: Beware of debt-relief companies that will ruin your credit (column)

Chris Neuswanger
The Mountain Mortgage Guy

Sometimes consumers get in over their heads in debt. Living with constant phone calls and past-due notices and trying to pay a huge chunk of your paycheck every month just to the minimum payments can seem daunting.

There are "debt-relief" companies out there that tout their services in terms of claiming to negotiate debt settlements and reduced payment plans as an alternative to bankruptcy. Unfortunately, many consumers who do have the ability to pay their bills are sucked into the pitch as an easy way to dump some of their debt. For others who don't have the ability to pay, there may be other options that will cost them less and leave them with better credit afterward, including, in some cases, bankruptcy.

How these companies work is first they tell you to quit paying on probably everything but your mortgage or your car loan (because your car can be repossessed and your home foreclosed on). This immediately nukes your credit rating, which can impact issues such as the price you pay for car insurance or your ability to secure a rental home.

After a while, they negotiate a repayment plan and reduced settlement agreement with your creditors and collect one monthly payment from you and dole out the money to your creditors over a number of years to eventually pay off your debts.

“While this does save the consumer some money in terms of the final cost of paying off these debts, the consumer also pays a large fee to the settlement company that will substantially reduce the perceived savings. In addition, every account is listed on the credit report as a charge off, but because the creditor is getting payments every month, the account is updated monthly as a charge off with a declining balance, which is a bad thing on your credit.”

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While this does save the consumer some money in terms of the final cost of paying off these debts, the consumer also pays a large fee to the settlement company that will substantially reduce the perceived savings. In addition, every account is listed on the credit report as a charge off, but because the creditor is getting payments every month, the account is updated monthly as a charge off with a declining balance, which is a bad thing on your credit.

Debatable Value

Typically if an account is charged off, it is reported as such once, and over time, the impact of the negative information lessens. If the consumer settles the debt for less than the full amount but makes payments to do so, then the account is updated monthly, appearing to the credit-scoring model as a fresh derogatory report.

The end result is a consumer can make their monthly payments on time to the debt-reduction company, which can pass them onto the original creditor on time, but the consumer's credit rating will be run through the shredder probably worse than if the consumer had declared bankruptcy or renegotiated the loan to a lower interest rate and specified term.

Some days there are no good answers if you are in debt overhead, but these firms are out to make money off you and the value of the services they provide are debatable.

Chris Neuswanger is a mortgage loan originator with Macro Financial Group in Avon and may be reached at 970-748-0342. He welcomes mortgage-related questions from readers. His website and blog can be found at http://www.mtnmortgageguy.com.