Debt Relief Scams and Shams

125% mortgages
Debt Compromise
Debt Relief and "Secret program" of credit card companies
Variation on this "Secret Program"
Foreclosure "fixes"
Mortgage Fraud
Interest-free loans
Have questions we did not answer?

125% Mortgages  

Finance companies are pushing hard for your decision to use your real estate as collateral for debt consolidation loans.   They are offering loans of up to 1 1/4 above the value of your house.   They are so accomodating that they will even claim that your house is worth significantly more than you expected.   Their appraisals are worthless.   They are merely "fluffing" up the value so you will think the loan is a good deal.   (See 'mortgage fraud', below.)  Be very careful.  You may put yourself into a position where you may lose your real estate.  These loans are considered as mortgages on your real estate and if, for any reason, you get behind, the creditor would have the right to foreclose on that mortgage.  In many cases, also, you may have no or not have enough equity in the real estate to even be able to sell it.  If you are near retirement, you may end up having a house whose payments you cannot afford since  your income will usually decline upon retirements.   Don't lock yourself into a trap you may not be able to escape from, even if you file bankruptcy.

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Debt Compromise

 Although this method to handle your debts os not really a scam, it is necessary to understand the concept of "Debt Compromise" to understand how the scams work. 

When a creditor is feeling a bit insecure about your ability to pay the debt in full and realizes that it is unlikely that you have any assets to speak of against which he can take action, he is likely to want to 'compromise' the debt with a lump sum payment at a significant discount, and forgive the balance.   Unfortunately, very few of us has that kind of cash to pay off our debts at 'pennies on the dollar'.    That is where the scams and shams come in. See below.

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Debt Relief and "Secret Program" of credit card companies 

Some companies advertise that there is a "big secret program that creditors don't want you to know about".   They claim that your credit foreclosure debts can be paid off in two or three years at payments half as large as you are paying now and at 50% of what you owe.    .   Sound good so far?

I did what a certain ex president (Clinton) said we were allowed to do: I lied through my teeth to two companies, both out-of-state,  I called.

I told them that I owed $30,000.00 in credit foreclosure debt and asked how they might help me.   They proceeded to tell me to STOP paying those debts and, instead of paying the creditors I was to pay that company $418.00 per month to the company I called for the next three years.   During that period of time I will have paid them approximately $15,000.00.   Out of those payments they would take their fee; one would have charged approximately $2,700.00 and the $3,400.00.   With the balance of the money in their possession they would start compromising my debts (settling claims).

As I said above, when a creditor has not been paid for a long time - two or three years - they start thinking that "a half a loaf is better than no loaf" and will accept a lump sum payment much smaller than the balance owed in complete settlement of the claim.   It is not uncommon for them to accept a lump sum payment of $3,000.00 to $4,000.00 in complete settlement of a $10,000.00 obligation.

Under normal circumstances, very few have the money to pay such compromised sums.   These companies, with your co-operation, create the situation and the means to do just that.    By paying these out-of-state companies this usually fixed amount, you now have the money, in their possession,  to compromise a major portion of your debts for "pennies on the dollar" in a "matter of two or three years".   Of course, the money is in the control of someone other than you.   Sounds good so far

They do not tell you three very important things: 

(1) First, the creditor will report you to the credit bureau and ruin you credit for about four to five years (two to three in the program and another two or three to re-establish your credit); you will show up as delinquent on your debts.  Try getting a loan with that on your credit.    

(2) Second, the creditor WILL SUE YOU.  Since you owe the money they will get judgment against you and then they can Garnish your wages (take approximately 1/4 of your monthly income), attach property such as bank accounts and non-exempt vehicles, and place a lien on your real estate.   The attorney may do all or only the most effective way for  pressuring  you to pay the debt.  What can be more effective than a foreclosure of the judgment lien on your house?  Ore even losing 1/4 of your pay each month?

When someone is sued, the first thing they look to is another attorney to protect them from Garnishments, Attachments and the putting of liens on their real estate.   That attorney may recommend bankruptcy as a solution to this problem.   Since you are with this company and are in it to the tune of several thousand dollars, you call them up for help.   What you may hear is: "don't worry.  We know a good attorney in your city who can help you." ... file bankruptcy, but more likely one who will act to stall the law suit to give the scammer time to negotiate a compromise."

(3)  This brings us to the third problem with the "secret program";  all of the contracts you sign exclude attorney fees from their charges.   You are on your own to pay additional fees to stall each law suit. 

One of the companies I called even suggested that if I pay an additiona $25.00 per month, they will put it into a fund to help defray legal expenses should I be sued.    What, toward my eventual bankruptcy or toward defending me in the law suit?   It would have been very unlikely to have been used to fight the law suit;  since I owed the money, I would lose and waste the money in their hands.

This sound like a pretty expensive way to do what you, perhaps, should have done from the beginning.

(4) The fourth problem is that when a creditor forgives a debt,  he will normally issue a Form 1099C to the IRS in the amount of the forgiven debt.   This means that you could potentially be liable for taxes on such forgiven debt.   Forgiven debt is potentially taxable, to the extent that you are solvent after the transaction.   Having a debt discharged in bankruptcy is not a taxable event: but a forgiveness of debt is.  

So, if this scheme really works, you have paid approximately half the amount you owe to the company, out of which significant fees are retained to cover their fees; you have paid additional fees to an attorney to stall the law suit and an additional amount to the IRS.   Is this a bargain?   What will this secret program really cost you?   Filing bankruptcy is much less expensive and you get debt relief in weeks, not years.

Can this method ever work?     Honestly, yes!     This method can work if you do not mind  (1) having problems with your credit; (2) having the IRS on your back; and, (3) you have a lot of relatively small debts.     Very few creditors or attorneys will sue you when the amount you owe them is only a few hundred dollars.    The trigger for you to file bankruptcy is that law suit.    So, if you have a large number a small debts, call these companies.    That may be the solution to your problem. .

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Variation on this "Secret Program"  

A variation of this is: they offer you a mortgage on your house so you can stop the foreclosure.   This variation is only offered if you have some significant equity in your home.   You have replaced one creditor with an other and when you again get behind on their mortgage, they foreclose and get that equity.

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Foreclosure "fixes"

 Some others, not finance companies, are offering a quick fix to foreclosures.   They ask for a large fee and offer to make the foreclosure go away.    They refer to their "Program 10".    Their story is that they will slow the foreclosure down to give you time to get a new mortgage to replace to one that is in foreclosure.   The odds are slim to nothing that you will be able to refinance your mortgage.

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Mortgage Fraud

Once a nuisance to a handful of lenders, mortgage fraud has blossomed into one of the fastest-growing white-collar crimes in the country, putting homeowners on the hook for overpriced houses and pushing up interest rates for all home loans, the Wall Street Journal reported Sunday. In some cases, scammers buy dilapidated houses, get fake appraisals to inflate the value and sell the homes for far more than they're worth, industry experts say. Conversely, fraudsters find novice real estate investors and convince them to sell their good name and credit record. In return, scammers promise to arrange a loan on an investment property, find tenants, make mortgage payments and sell the property for huge profits once it appreciates. For borrowers, the effects can be devastating, including losing a home through foreclosure once it's revealed the house is worth far less than the mortgage loan. This usually happens when the borrower goes to refinance or sell and a true appraisal is done. Lenders will often work with unwitting fraud victims to try to keep their credit from being ruined, but many borrowers simply don't want to be on the hook for more money than their homes are worth. Many just walk away, damaging their credit. Some wind up filing for bankruptcy. "They'll hit four or five properties in one small area, the properties will get foreclosed upon and then boarded up," said Tim Doyle, senior director of government affairs at the Mortgage Bankers Association. "That affects other people's property values."  From the Wall Street Journal.  

PLease refer to 125% mortgages, above.

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Interst-free loans

Some companies are even offering loans where all you pay on your mortgage is the interest for a set period of time (20 years) and then pay a balloon payment of the principal after such period.   You end up never paying down the mortgage over that period.   You are still in debt after 20 years. And they still have your house in case you can not pay the mortgage.

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Have questions we didn't answer?  

I am certain that there are variations on the above basic themes.    The best protection against those who wish to have you part with your money, or assets, is to learn as much as you can about your options.   This web site is a good start to learning about your options, but not all-inclusive.   My best advice to you is to use as many search terms you can think of and either google them or yahoo them.   There are other sites that have a lot of information and cautions about how to handle your financial difficulties.   The worst thing you can do is look at only one or two options.    remember, your future is in your hands, not in the governments, and definitely not in the hands of financial institutions; that is, unless you willingly place yourself in their hands without thinking and doing your homework.

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