How Debt Consolidation Companies Make Money

Most debt consolidation companies claim to be nonprofit, but they make a lot of revenue at the expense of their customers. These companies charge customers in several different ways. Some charge a percentage of the payments made to the lenders. Some keep the first one or two payments for "administration costs," which can cause the customer to be considered delinquent from the creditors' standpoint.

An Everyday Example

Let's look at an example of debt consolidation. Let's say you're facing $20,000 in credit card debt. You turn to a debt consolidation company, attracted by its nonprofit status. You are stunned when they pocket your entire first payment as a "voluntary contribution." You're also surprised to learn that the company is collecting nearly 10% of your payments as "continuing contributions." Of course this is disclosed in the "fine print" of the contract, but you figured you could trust a "nonprofit" company.

Besides, the representative never disclosed the fees as he applied pressure for you to sign quickly. The fees also put you behind with your creditors, triggering late fees. By now you understand the truth: They're not doing credit counseling; they're just passing through your money and skimming some off the top for themselves. That doesn't sound like a non-profit company to you.

Still Not Convinced?

Here's another example, this one involving debt settlement.

Let's say you have racked up $20,000 in unsecured credit card debts. You owe $10,000 to one credit card company, $7,000 to another one and $3,000 to a third one. You agree to contract for a five-year debt settlement plan where you pay $250 a month to the settlement company.

Sounds good, right? After all, $250 a month for five years is only $15,000, so you're saving $5,000, and you'll be debt-free in just five years, right?

Let's examine this arrangement a bit closer. The admin fee will cost you $750 up front. Your first three monthly payments go toward that admin fee and nothing gets put into your trust account until your fourth monthly payment has been paid. The settlement company takes the first $50 of your $250 payment every month as the service fee. That means that only $200 a month is actually being added to your trust account.

Most debt settlement companies will claim to be able to settle your debt for about half of what you actually owe, so let's use the middle credit card debt as an example:

If you owe $7,000 on the account and the creditor agrees to accept $3,500 as payment in full, it will take you eight months at $200 per month to have accrued enough cash in your trust account to pay off just that one credit card bill.

But remember, your first three payments to the debt settlement company only paid the $750 admin fee. That means your first credit card isn't really settled until 11 months after you started sending them money! So what is the problem? It's really very simple—your creditor won't agree to accept half of your actual debt amount in settlement unless, or until, that amount can be paid in full. Otherwise, they'll expect you to make your normal monthly payments.

So What?

Debt consolidation companies, even the "nonprofits," are in the business to make money. Debt consolidation is nothing more than a "con" because you think you've done something about the debt problem. The debt is still there, as are the habits that caused it—you just moved it! You can't borrow your way out of debt. You can't get out of a hole by digging out the bottom. Real debt help is not quick or easy.