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A friend of mine recently attempted to go though debt consolidation. He received a phone call and was offered really good terms to consolidate his current debts. A promise was made that the company would negotiate with the creditors and reduce their debt by nearly 60%. This included 30k in Student loan debt and about 15k in other debt.

They were advised to stop making payments on their debts and send the money instead to the debt consolidation company. The company said it would then pay off the debts and issue the a loan for the reduced amount. Well 2 months went by with them sending the required payments via certified check. In this time they defaulted on their car loan and their student loans. The company said they would take care of it not to worry. Even took contact information for the companies.

Finally the company told them they were sorry they were not able to help them. That the money they had sent was for the application and approval process. The company is now out of business and the AG is investigating but the investigators said that any recovery was unlikely. What steps can people take to be sure that the debt consolidation offer is real?

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2 Answers

I believe no-one who's in a legal line of business would tell you to default voluntarily on your obligations.

Once you get an offer that's too good to be true, and for which you have to do something that is either illegal or very damaging to you - it is probably a scam.

Also, if someone requires you to send any money without a prior written agreement - its probably a scam as well, especially in such a delicate matter as finances. Your friend now should also be worried about identity theft as he voluntary gave tons of personal information to these people.

Bottom line - if it walks like a duck, talks like a duck and looks like a duck, it is probably a duck. Your friend had all the warning signs other than a huge neon light saying "Scam" pointing at these people, and he still went through it.

For real debt consolidation companies, research well: online reviews, BBB ratings and reviews, time in business, etc. If you can't find any - don't deal with them. Also, if you get promises for debtors to out of the blue give up on some of their money - its a sign of a scam. Why would debtors reduce the debt by 60%? He's paying, he can pay, he is not on the way to bankruptcy (or is he?)? Why did he do it to begin with?

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+1 Student Loans survive bankruptcy, they are not settling for 50 or 60 cents on the dollar. That was my clue. –  JoeTaxpayer Mar 20 '12 at 17:31
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@littleadv I liked your answer, I am really not trying to criticize it. The propriety and morality of a strategic default is just a hobby horse of mine. I argue this with family and friends all the time. It angers me that we as a society let corporations off the hook for any sort of morality when making financial decisions like a strategic default or letting people go, and those same corporations use guilt as a tool to hang the consumers. –  Pablitorun Mar 20 '12 at 19:54
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@Pablitorun I think that you're right about the discontent with what we allow the corporations to get away with, but I don't think the solution is to allow anyone to get away with these things, I'd rather no-one to get away with them. Justifying "strategic default" is in my opinion similar to justifying a "strategic theft". I don't care if its a corporation that does it or an individual, its immoral all the same. –  littleadv Mar 20 '12 at 22:12
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@littleadv: this is the first time I read of duck typing being applied to finance, and it sounded awesome :-D –  f1StudentInUS Mar 21 '12 at 5:50
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@Pablitorun - You missed your payment. You defaulted not your company. The company did not just decide to cancel your policy because you went on vacation. A better comparison would be the company deciding not to pay out on a policy because it will cost them a lot of money to honor their obligation. Can you imagine how that would play out. –  user4127 Mar 21 '12 at 17:06
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I think in such situations a good rule of thumb may be - if you are asked to pay significant sums of money upfront before anything is done, stop and ask yourself, what would you do if they don't do what they promised? They know who you are, but usually most you know is a company name and phone number. Both can disappear in a minute and what are you left with?

If they said they'd pay off the debt and issue the new loan - fine, let them do it and then you pay them. If they insist on having money upfront without delivering anything - unless it's a very big and known and established company you probably better off not doing it. Either it's a scam or in the minuscule chance they are legit you still risking too much - you're giving money and not getting anything in return.

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-1 because most of the consolidation companies simply finance the upfront fees that they charge. Even the some(if not all) of the non profits charge fees for the consolidation. Being asked to pay those upfront is not necessarily a sign of shady business practice. Documents were sent that made it look official and above board(to my friend I dont trust extend this much trust to my mom let alone some faceless person on the phone). I agree you should understand what those payments are for before you send them though. –  user4127 Mar 21 '12 at 12:35
    
Not necessarily but it makes very easy for them to cheat you. So if you are dealing with somebody you never heard about before and the most you have for your money is a paper with empty promises - not a good position to be in. –  StasM Mar 21 '12 at 16:36
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Personally I think that the vast majority of debt consolidation companies are screwing you. This one was just out right fraud. From what I have gathered the nature of debt consolodation firms means that this fraud is not terribly uncommon. –  user4127 Mar 21 '12 at 17:12
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@Chad, not surprisingly, they're preying the weak. –  littleadv Mar 21 '12 at 17:56
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protected by Chris W. Rea Jun 19 '13 at 13:16

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