Debt relief by purposely allowing accounts to go to collections and not paying?

[WAZ]

** A little backstory to flesh out the characters and allow you to understand our situation. Feel free to skip ahead to the actual question. **

Long story short, my wife and I both had great (750+) credit scores for the last 10-15 years. We never used to use credit cards. But 3 years ago she had to take a new job with a $7k/year pay-cut at the same time we started paying $600/mo in day care... so we started putting stuff on cards because we had to. Between all sorts of living expenses, multiple expensive car repairs, a huge tax bill, etc, we've accumulated about $14,000 in credit card debt across 7 cards.

All but one account are current and in good standing. But the one "bad" account is a Chase card with about $5,000 on it, where the monthly payments just plain got to be too much and we fell behind several months. We're trying to make it right and want to consolidate the debt from all (or at least most) of the cards... both to lower our monthly payments and to pay off the accounts that have become unsustainable. Just paying the minimum payments adds up to about $350 to $400/mo across all the different cards.


** START OF ACTUAL QUESTION **

So I've contacted a few debt consolidators and loan companies. And yesterday I got a call saying I was denied a consolidation loan (poor income-to-debt ratio, and my credit score has dropped to 560 due to my delinquent Chase account and one collection I had years ago, but DID pay, on a medical bill -- sidebar: F**k Aetna) but was referred to this other company for their "Debt Rehabilitation Program".

They stressed several times that it was Debt Rehabilitation and NOT Debt Consolidation -- it's not a loan, and they would NOT be paying the creditors. Instead, I would pay them $268/mo for 23 months and then be done. Debt disappeared. Credit score going back up to the 700s. Saving lots of money per month, becoming debt free in two years, and villagers rejoicing.

How would my debt disappear? Well I am to stop paying ALL of my credit card bills. Not only the bad Chase account, but all of my cards in good standing as well. Just stop paying any of them. Then they will all send my accounts to collections (the whole spiel about debt collectors buying bad accounts for pennies on the dollar after being written off by the original creditors)... and then THIS debt rehab company would basically work to prove that the debt collectors have no legal right to collect that debt.

They would demand that the collectors produce documentation proving they can legally collect that debt -- which theoretically they can't? -- at which point the debt collectors give up and move on. Once they can't produce the necessary proof/documentation, and this company I have hired has basically stopped them from collecting the debt they bought for pennies, then the collectors cannot legally report that to the credit agencies, at which point that debt is no longer reported and my score goes up. I'll remind you this process of letting my accounts purposely go delinquent would apply to several creditors that I am currently in good standing with. That is the process as I was told -- all I have to do is give them my banking info and sign up for the 23-month program.

Not only did the total payments ($268/mo over 23 months to get rid of $14k in debt) seem too good to be true, but the method seems sketchy as f**k. And while I'm not morally opposed to "sticking it" to behemoth banks or asshole debt collectors -- and of course I'm desperate to relieve this debt and lower my payments, so I'm willing to try anything -- something about this just doesn't seem right. Is this even LEGAL? Is there any sort of gray area here (i.e. sketchy but screw it, fine, let's just do it)? Or is this super messed up, possibly illegal, and I might just be being straight up scammed?

 

[[DHT]Osiris]

** A little backstory to flesh out the characters and allow you to understand our situation. Feel free to skip ahead to the actual question. **

Long story short, my wife and I both had great (750+) credit scores for the last 10-15 years. We never used to use credit cards. But 3 years ago she had to take a new job with a $7k/year pay-cut at the same time we started paying $600/mo in day care... so we started putting stuff on cards because we had to. Between all sorts of living expenses, multiple expensive car repairs, a huge tax bill, etc, we've accumulated about $14,000 in credit card debt across 7 cards.

All but one account are current and in good standing. But the one "bad" account is a Chase card with about $5,000 on it, where the monthly payments just plain got to be too much and we fell behind several months. We're trying to make it right and want to consolidate the debt from all (or at least most) of the cards... both to lower our monthly payments and to pay off the accounts that have become unsustainable. Just paying the minimum payments adds up to about $350 to $400/mo across all the different cards.


** START OF ACTUAL QUESTION **

So I've contacted a few debt consolidators and loan companies. And yesterday I got a call saying I was denied a consolidation loan (poor income-to-debt ratio, and my credit score has dropped to 560 due to my delinquent Chase account and one collection I had years ago, but DID pay, on a medical bill -- sidebar: F**k Aetna) but was referred to this other company for their "Debt Rehabilitation Program".

They stressed several times that it was Debt Rehabilitation and NOT Debt Consolidation -- it's not a loan, and they would NOT be paying the creditors. Instead, I would pay them $268/mo for 23 months and then be done. Debt disappeared. Credit score going back up to the 700s. Saving lots of money per month, becoming debt free in two years, and villagers rejoicing.

How would my debt disappear? Well I am to stop paying ALL of my credit card bills. Not only the bad Chase account, but all of my cards in good standing as well. Just stop paying any of them. Then they will all send my accounts to collections (the whole spiel about debt collectors buying bad accounts for pennies on the dollar after being written off by the original creditors)... and then THIS debt rehab company would basically work to prove that the debt collectors have no legal right to collect that debt.

They would demand that the collectors produce documentation proving they can legally collect that debt -- which theoretically they can't? -- at which point the debt collectors give up and move on. Once they can't produce the necessary proof/documentation, and this company I have hired has basically stopped them from collecting the debt they bought for pennies, then the collectors cannot legally report that to the credit agencies, at which point that debt is no longer reported and my score goes up. I'll remind you this process of letting my accounts purposely go delinquent would apply to several creditors that I am currently in good standing with. That is the process as I was told -- all I have to do is give them my banking info and sign up for the 23-month program.

Not only did the total payments ($268/mo over 23 months to get rid of $14k in debt) seem too good to be true, but the method seems sketchy as f**k. And while I'm not morally opposed to "sticking it" to behemoth banks or asshole debt collectors -- and of course I'm desperate to relieve this debt and lower my payments, so I'm willing to try anything -- something about this just doesn't seem right. Is this even LEGAL? Is there any sort of gray area here (i.e. sketchy but screw it, fine, let's just do it)? Or is this super messed up, possibly illegal, and I might just be being straight up scammed?

Sounds scammy, I wouldn't go near it. If you can't get a no-kidding debt consolidation company to do this (where the pay off your debt and you pay them instead), either straighten your financial shit out (trust me, there's a way in there somehow) or start looking at bankruptcy options.

But really, there's a way to pay that shit off, trust me, done it a few times.

 

[highland145]

Bankruptcy and start over.

 

[Genx87]

Eh this sounds like a real bad idea. If a debt collector purchases your debt. How are they not able to legally collect the debt? Worse, this plan relies on every CC company selling the debt to collections. That may not happen. Even after all of this goes through your credit will look terrible because you will have a bunch of obligations that were never paid on your report.

Buck up and find a way to pay down your debt. IMO bankruptcy over 14K is a bad idea.

 

[dullard]

Sounds like a scam to me. At best, the credit card companies will just sell the debt to another company and you have to start all over again later (and probably have to pay that company again and again and again as the debt keeps being sold).

$14,000 is probably too small for a bankruptcy to be worth it.

Your best first bet is to talk to all credit card companies (and any other company that you are in debt with) and see if they will voluntarily help you out by lowering payments. That is free, legal, and just takes a bit of persistence.

Then, of course, reduce all costs. Everyone has some extra expenses that aren't really needed. We are here to provide ideas if you want.

 

[WAZ]

Yeah, I don't think we'll go the bankruptcy route; we're otherwise completely fine on expenses, never one day late on a single mortgage payment in 11 years, nor on any car payments or student loans. It's just these damn credit cards that I think we can pay off. It's just the HOW. And this company's methods kinda threw a wrench in things.

I've spoken to Chase about applying for a settlement amount... basically seeing if they'll reduce the delinquent $5k to a lowered settled amount if I can pay it off in one lump sum. We've looked into options like a loan from somewhere like Lending Club, Prosper, or other comparable companies... e.g. a $15,000 loan paid off over 5 years. If we take it out in my wife's name, her 730-score credit is still good to get a decent rate. Then we use that money to pay off ALL the cards in lump-sums... possibly at lowered settled amounts, and just pay off that one single loan over the next several years. The monthly payments aren't reduced as much as we'd like, but they're at least comparable to what we're paying in minimum payments now... with the added bonus of actually paying them off instead of just paying minimums towards interest for the next 20 years.

 

[highland145]

IMO bankruptcy over 14K is a bad idea.

$14,000 is probably too small for a bankruptcy to be worth it.

It is, depending ....but the he will be able to start over immediately. When the BK is discharged, he can get the derogatory trade lines removed.

edit:
Yeah, I don't think we'll go the bankruptcy route; we're otherwise completely fine on expenses, never one day late on a single mortgage payment in 11 years, nor on any car payments or student loans.

That makes a difference.

 

[WAZ]

Even after all of this goes through your credit will look terrible because you will have a bunch of obligations that were never paid on your report.

That's exactly what I asked them. Her response was that (for some reason?) once it's proven they can't legally collect, then they aren't allowed to report it to the credit agencies...? So somehow those would not be on my credit report.

That answer didn't add up. Honestly almost none of this did. I'm pretty sure I had already decided to say no anyway, but almost wanted affirmation that this wasn't a viable route.

 

[Genx87]

One more option. Do you own a house? Equity line to pay down the debt using the house. Bonus is interest payments on the equity line are tax deductible. But if you go this route make sure to cut up most of those cards and never run a balance again.

 

[purbeast0]

Not only did the total payments ($268/mo over 23 months to get rid of $14k in debt) seem too good to be true, but the method seems sketchy as f**k. And while I'm not morally opposed to "sticking it" to behemoth banks or asshole debt collectors -- and of course I'm desperate to relieve this debt and lower my payments, so I'm willing to try anything -- something about this just doesn't seem right. Is this even LEGAL? Is there any sort of gray area here (i.e. sketchy but screw it, fine, let's just do it)? Or is this super messed up, possibly illegal, and I might just be being straight up scammed?

I don't understand the bolded. If your dumbass was financially responsible, you wouldn't have any reason to "stick it" to them. I mean you spent their money that you didn't have, and now you're crying about having to pay it back. How about you don't spend the money you don't have in the first place?

Sorry but that shit just grinds my gears. No one wants to take responsibility for anything anymore.

 

[Fardringle]

While the plan as outlined could result in easier payment of the debts IF the accounts get sold to collections at a discounted balance amount, you definitely would not end up with 700+ credit rating after that. If anything your rating will go down even more than it is now since every single instance of a late/unpaid monthly bill can be (and frequently is) added to your credit report as a negative item, and those accounts going to collections will negatively affect the score even more.

As far as the collectors producing legal evidence of the debt, if they purchased the debt from a credit card or mortgage company, that bill of sale is their legal proof that you owe them the money and they can collect the debt from you.

There are many legitimate and more effective things that you can do to clean up the debt. The first thing I would do (I am not a financial advisor - this is just what I did personally and that worked for me) is look at all of your existing credit accounts to see if any have enough available balance to transfer the entire $5000 away from Chase, especially if the other account has a better interest rate. Maybe talk to the issuer of that other card first to see if they can give you an even better interest rate on the balance transfer since you have been a "good debt" with them by keeping the account paid properly and on time.

This will mark the Chase account as Paid in Full on your credit report, and while that won't erase the bad marks that you already have from the past, it will start increasing your credit score by simply having the zero balance on the account and it will eliminate future bad marks from past due/unpaid monthly bills on that card. It will also let the old late payment reports start aging off of the report, which will also help improve your credit rating gradually improve. It will also reduce your total monthly debt payments since you'll be paying less interest on that $5000 balance. Do not close the Chase account (yet), but also do not use that card again. Once you are out of debt you can get rid of a few cards that you no longer need, but in the short term you want to keep the account(s) open with a zero balance (I'll explain why in the next paragraph) as long as they don't have an annual fee.

Then look at your other debts, find the one with the lowest remaining balance with the highest interest rate, and put any extra money that you can into the monthly payments for that debt to pay it off faster. Once that debt is gone, take all of the money you were paying into it and pay it into the next debt on the list. Move down your list, migrating the payments as you go. The goal is to get rid of individual payments as quickly as possible, which will reduce the chances of multiple new late/missed payments each month, as well as increasing your credit score by eliminating outstanding debts on the credit report (having available unused credit actually helps the score once you get to the point where you actually owe less than 30% of your total available credit limits).

This is essentially what a legitimate credit counseling/consolidation service will do. The main difference is that you pay them a fee to manage everything for you instead of doing it yourself. If it's worth it to you to pay a fee instead of managing it yourself, go for it. But definitely do not go with the "rehabilitation" plan that you described since even if it does manage to help you get the debt paid off in two years (unlikely since they sound very shady from your description) if they do what you said they offered to do it will destroy the already low credit rating that you have right now.

 

[Capt Caveman]

One more option. Do you own a house? Equity line to pay down the debt using the house. Bonus is interest payments on the equity line are tax deductible. But if you go this route make sure to cut up most of those cards and never run a balance again.

Was going to suggest this, if there's equity in the house.

 

[WAZ]

I don't understand the bolded. If your dumbass was financially responsible, you wouldn't have any reason to "stick it" to them. I mean you spent their money that you didn't have, and now you're crying about having to pay it back. How about you don't spend the money you don't have in the first place?

Sorry but that shit just grinds my gears. No one wants to take responsibility for anything anymore.

I love how my entire post is about how to take responsibility and get out of debt, and this is what you latch onto. I'm so terribly sorry for "grinding your gears" up there on your soapbox. Not everyone is so lucky to be able to not have to decide how to pay for groceries or daycare or a car repair. We're not crying about paying anything back and (if you had actually read my post instead of complaining about how "irresponsible my dumbass is", you would know) are exploring all options including several loans. So if you don't have any useful advice and are only looking to attack me and my financial situation, kindly eat a dick and move on to another thread. Thanks.

And as for "sticking it" to debt collectors -- say what you will (and I'm sure you will), but no, that would not keep me up at night:

 

[highland145]

If he doesn't have the heloc then he probably can't get in with the current fico.

 

[Ns1]

OP:

Your method works. This is the forum you are looking for.

http://www.creditinfocenter.com/community/

Your credit will be wasted for 7 years instead of 10 with a bankruptcy. It looks slightly less bad than a bankruptcy.

Only do this if you have a high tolerance for stress - you can do this yourself.

 

[BurnItDwn]

Can you or the wife work overtime for time and a half pay?
Can you or the wife take on a second job?

Can you move to a place with lower rent or find less expensive child care or shift one of your work scheduled around so that you don't have to pay for day care at all?
Can you eat less expensive groceries? Can you drive cheaper to maintain vehicles? Can you drive less to minimize wear and tear on your vehicle(s)? Can you cancel TV service? Can you use cheaper phones or phone plans? Can you quit smoking or drinking?

Too many people refuse to cut costs because they work too hard and feel like they deserve some breaks. Im not going to argue that. I would only argue that if you give up some of these things, you may find your economic situation improving. You need to prove you can get your monthly costs below your monthly income. Make it sustainable.

If you can not make it work with the debt load, then Highland's advice to declare bankruptcy is likely the best advice....

 

[WAZ]

One more option. Do you own a house? Equity line to pay down the debt using the house. Bonus is interest payments on the equity line are tax deductible. But if you go this route make sure to cut up most of those cards and never run a balance again.

We do own a house (well, bought 11 years ago and are 8 years into a refinance), and when we checked about 2 years ago we did not quite have enough equity in the house to go that route. Maybe we do now. We would have to try again and see if we've paid down enough to be approved for a line big enough to cover this debt.

Otherwise we have been approved for a $15,200 loan @ 15.99% interest... $369/mo for the next 5 years. Which would be enough to pay off ALL the cards in lump-sums, and pay off everything in 5 years at a monthly payment comparable to what we're paying now in minimum payments alone. It's not ideal, especially at that interest rate, but it's something.

 

[purbeast0]

I love how my entire post is about how to take responsibility and get out of debt, and this is what you latch onto. I'm so terribly sorry for "grinding your gears" up there on your soapbox. Not everyone is so lucky to be able to not have to decide how to pay for groceries or daycare or a car repair. We're not crying about paying anything back and (if you had actually read my post instead of complaining about how "irresponsible my dumbass is", you would know) are exploring all options including several loans. So if you don't have any useful advice and are only looking to attack me and my financial situation, kindly eat a dick and move on to another thread. Thanks.

And as for "sticking it" to debt collectors -- say what you will (and I'm sure you will), but no, that would not keep me up at night:

No matter what you "said" you're still trying to take the easy way out by not paying back the money you borrowed. Try to spin it however you want and say what you want - but at the end of the day you are looking to get out of $14k of debt by paying a fraction of that. And all of this could have been avoided had you never spent the $14k you didn't have in the first place.

It's not "luck" on how to pay for groceries or day care. It's called responsibility. You're on a tech forum here on a computer so clearly you have enough money to buy a computer and internet service. As someone else mentioned, I bet if you really looked at your expenses you could easily cut costs somewhere, as the majority of people can. They just don't want to because it is 'too hard' to do that.

And I did read your whole post. Your whole post is you basically you asking if paying $268/mo for 23 months to get out of a $14k debt is a good idea or a scam. Think about that for a second. How does that add up?

 

[highland145]

OP:

Your method works. This is the forum you are looking for.

http://www.creditinfocenter.com/community/

Your credit will be wasted for 7 years instead of 10 with a bankruptcy. It looks slightly less bad than a bankruptcy.

Only do this if you have a high tolerance for stress - you can do this yourself.

Not pushing the OP towards BK but that's not what I've seen with people intent on improving their score.

 

[WAZ]

There are many legitimate and more effective things that you can do to clean up the debt. The first thing I would do (I am not a financial advisor - this is just what I did personally and that worked for me) is look at all of your existing credit accounts to see if any have enough available balance to transfer the entire $5000 away from Chase, especially if the other account has a better interest rate. Maybe talk to the issuer of that other card first to see if they can give you an even better interest rate on the balance transfer since you have been a "good debt" with them by keeping the account paid properly and on time.

This will mark the Chase account as Paid in Full on your credit report, and while that won't erase the bad marks that you already have from the past, it will start increasing your credit score by simply having the zero balance on the account and it will eliminate future bad marks from past due/unpaid monthly bills on that card. It will also let the old late payment reports start aging off of the report, which will also help improve your credit rating gradually improve. It will also reduce your total monthly debt payments since you'll be paying less interest on that $5000 balance. Do not close the Chase account (yet), but also do not use that card again. Once you are out of debt you can get rid of a few cards that you no longer need, but in the short term you want to keep the account(s) open with a zero balance (I'll explain why in the next paragraph) as long as they don't have an annual fee.

This is what we started doing with a couple of the cards. Moved some debt from high-interest cards over to a 0% card with no balance transfer fee... then just had one payment to them instead of 3 to other high-interest ones. I couldn't get approved for enough to move the full $5k from Chase, but hopefully with something like Lending Club or Prosper, and with a loan in my wife's name with her good credit, we can get approved for a higher amount at a lower rate in order to do exactly what you're suggesting. Then Chase gets paid, other creditors get paid, and we pay lower interest while increasing my score. Thank you for the advice.

 

[highland145]

We do own a house (well, bought 11 years ago and are 8 years into a refinance), and when we checked about 2 years ago we did not quite have enough equity in the house to go that route. Maybe we do now. We would have to try again and see if we've paid down enough to be approved for a line big enough to cover this debt.

Otherwise we have been approved for a $15,200 loan @ 15.99% interest... $369/mo for the next 5 years. Which would be enough to pay off ALL the cards in lump-sums, and pay off everything in 5 years at a monthly payment comparable to what we're paying now in minimum payments alone. It's not ideal, especially at that interest rate, but it's something.

If you pay off all of the other cards, don't close them. Your debt ratio will take a hit and your score. Just don't use them.

 

[highland145]

Can you or the wife work overtime for time and a half pay?
Can you or the wife take on a second job?

Can you move to a place with lower rent or find less expensive child care or shift one of your work scheduled around so that you don't have to pay for day care at all?
Can you eat less expensive groceries? Can you drive cheaper to maintain vehicles? Can you drive less to minimize wear and tear on your vehicle(s)? Can you cancel TV service? Can you use cheaper phones or phone plans? Can you quit smoking or drinking?

Too many people refuse to cut costs because they work too hard and feel like they deserve some breaks. Im not going to argue that. I would only argue that if you give up some of these things, you may find your economic situation improving. You need to prove you can get your monthly costs below your monthly income. Make it sustainable.

If you can not make it work with the debt load, then Highland's advice to declare bankruptcy is likely the best advice....

He'll still have the house/car/student loan payments/datcare that he can't get out of so I could very well be wrong. Hard to tell without seeing the whole picture.

 

[dullard]

It is, depending ....but the he will be able to start over immediately. When the BK is discharged, he can get the derogatory trade lines removed.

edit:
Yeah, I don't think we'll go the bankruptcy route; we're otherwise completely fine on expenses, never one day late on a single mortgage payment in 11 years, nor on any car payments or student loans.

That makes a difference.

The filing fee + attorney fee generally runs $1500 to $6000 depending on the type of bankruptcy needed. That is a pretty steep price to get just $14k discharged. A commonly used rule-of-thumb is to never file for bankruptcy if the debt is under $20k or the total net income, whichever is smaller. That is just a rule-of-thumb, and there is no minimum debt requirement, but imagine paying $3000 to discharge a $3000 debt. That would be painful, slow, and pointless.

 

[highland145]

The filing fee + attorney fee generally runs $1500 to $6000 depending on the type of bankruptcy needed. That is a pretty steep price to get just $14k discharged. A commonly used rule-of-thumb is to never file for bankruptcy if the debt is under $20k or the total net income, whichever is smaller. That is just a rule-of-thumb, and there is no minimum debt requirement, but imagine paying $3000 to discharge a $3000 debt. That would be painful, slow, and pointless.

Ha, welcome to low finance. My guess is that the lawyers dump some of their fees into the BK and get payments when the customer pays the court. Then the customer stops paying the court after a year, the creditors have already charged the $$ off and the court kicks the BK out.

I'm holding one in my hand. Customer owes me $350.00. Her car may be financed but it's older and I know she's renting. No way she could come up with $1500 so some deal has been worked out somewhere.

 

[crashtech]

Learning to use budgeting software (well, actually sticking to what it tells me to do) was the biggest part of getting out of debt for me. Without careful tracking of all income and expenditures, there's simply no way to know how much you can put toward debt service.