Winter of 1999. After four years of buying and selling houses, and delivering pizzas to bring some money in, I had put us into a $81,477 hole of credit card debt. The mortgage and our truck loan were current but my thirteen credit cards and one personal loan were blowing up in my face. There was nothing like the feeling of looking into the mirror and realizing the person looking back was a failed businessman.
So my wife and I did what the “conventional” wisdom told us to do. We went to visit a credit counselor to see what kind of help they could offer.
The counselor was nice and explained how the credit counseling plan worked. They would contact all of my credit card companies and attempt to negotiate the interest rates downwards. They could not reduce the principal that I owed but they could probably reduce my monthly payments. Then I would pay the credit counseling company a fixed amount each month, which the company would divide up and make payments to each of my credit cards. This is called a Debt Management Plan (DMP).
All of my credit cards would be closed out. Our mortgage and car loan could not be included in the DMP so we still had to pay those separately. And my credit report would treat the DMP like a chapter 13 bankruptcy so my credit score would be thrashed. But the collection calls would stop after a month or two because I would show as current again on my payments so I could answer the phone again!
The company was a non-profit but stated they would charge me $25 per month to do this, as well as a $25 set-up fee. I had heard credit counseling agencies worked for free because the credit card companies supported them, but this seemed inexpensive at the time. (Looking back, if this DMP took me five years to pay off, that would have been a $1525 cost to me.)
Unfortunately he also let us know that he could not help us until I had a job. Though we had some income coming in from investments that we had made years earlier, I had to show a job to my creditors with at least one month of pay stubs. They had to see firm income numbers from me so they could determine how far they would drop my interest rates.
We also had to create a monthly budget that my counselor could show to my creditors. They would reduce their interest rates but I had to show that we were maximizing the amount we would send in each month. No cable TV (this was before satellite TV!), no eating out, etc.
Two months later I had a job and a DMP. $1532 per month for five years was the approved amount. The counselor told us this was one of the largest DMPs he had seen approved but it looked doable. My DMP journey began.
For nine months the plan worked beautifully. I sent a cashier’s check to the counseling agency each month for $1532 and the collection calls stopped. Then I received a letter from the agency just before my tenth payment was due. Two of my creditors had decided to raise my interest rates so my new payment was increasing to $1572. I did not remember the counselor ever telling me this could happen! I called my counselor and he told me my creditors had the right to do this because they had lowered my interest rates so much to get me qualified for the DMP. I got angry but decided there was nothing I could do about it so I sent in the $1572 payment.
As you can imagine this was not a one-time increase. Two months later, another creditor decided to raise its interest rate so my payment increased to $1597. And one month after that, creditor #4 increased me to $1626. Nine more creditors could still increase their rates and nothing could prevent the first four from jacking up my rates again so I decided this had to end.
I sent each creditor a letter explaining that I could not afford to continue this DMP if my payment was going to increase every month. I wanted an assurance from all of them that they had to freeze my payment at $1626, or I would have to file for bankruptcy. Two agreed to this and I never heard from the others. So I dropped out of my DMP.
The good news was that my total debt had dropped to $68,955. The bad news was that I had paid $325 in fees to the counseling agency and I was still $68,955 in debt with no concrete plan to pay that off. And the collection calls were starting again.
My next post will cover my experience with bankruptcy and why this still did not permanently solve my debt problem!