Wednesday, May 11, 2005

Debt Elimination Programs

There has been a lot of email traffic selling debt elimination that isn't consolidation, bankruptcy, or negotiation. It is a dispute process.

In the mid 90s, these programs began to grow in popularity. They would hire their customers as agents to sell the service, with the promise that they would make a lot of money helping other people get out of debt. The barrier to the program is the upfront fee of a few thousand dollars, depending on the amount of debt you wanted to eliminate. What you were really purchasing was an educational set of audio CDs and ongoing email support as you followed their system for elimination.

The programs varied in many ways, in fact some were probably teaching illegal activity, such as using offshore accounts to avoid income tax. Some of them were smart enough to avoid the illegal aspects. The process would go something like this. The first step was usually to dispute the debt by sending a letter that cited their belief that the lender had created new money based on their signature on the loan application and did so without disclosing that fact to the borrower. It would go on to claim the borrower was entitled to the money created. The creditor would usually respond with a letter indicating that the dispute is frivolous, and their subsequent collection actions are allowed under federal law. They may cite a case to back their claim along with federal code that the dispute is frivolous, and the matter is closed. The debt is due as agreed in the loan agreement. As a matter of law, the bank would be correct.

There is a nice loophole in Regulation Z that allows the creditor to make the determination if an account dispute is frivolous. This is like letting the fox watch the chicken coup. It makes it very difficult for the customer when they have a dispute that the creditor doesn’t want to acknowledge. That leeway, coupled with their ability to allow charges to your account without your knowledge or express consent, is frustrating to say the least. As a result, this method of debt elimination was eventually doomed as credit card companies began to take the dispute seriously and aggressively pursue the account holder for collection.

It is also doomed because these account holders agreed to the credit card company's one sided terms that gave them permission to do what they do. Proverbs 22:7 says that the debtor is a slave to the lender, and Psalm 37:21 makes it clear that you must pay your debts. It is better to simply avoid debt.

No comments: