“Dear Steve,
In 2008 I had a successful internet service company with a 600,000 line of credit from SunTrust. When the financial crisis came in Fall 2008, SunTrust deemed themselves insecure on my outstanding balance and demanded full payment in 7 days. I was current on the line and in fact on all my business and personal debt and at the time had a Credit Score of about 775.
In order to meet the payment demand I was forced to liquidate my retirement savings at a time that the market was tanking. I managed to pay off the loans but was left with little liquidity and no credit. In order to run the business and not layoff people, I borrowed on my credit cards. Eventually things got out of hand and I had to lay off 60% of my staff and scale back after my customers stopped ordering or were slow to pay.
Eventually I was able to put things back together in a way that the company had positive current cash flow. But I have not been able to get any credit at a reasonable rate to pay off the high rate cards. There is about $90,000 in debt. I have paid off about 20% and I have never been late with a payment.
But now in order to grow and have a decent cash flow that covers week to week variations, I need credit and the ability to retain more of the cash flow. I can’t get credit with the amount of debt on revolving credit cards and I can’t conserve cash servicing the high rate credit cards.
Recently when I attempted a balance transfer to a lower rate card, I was denied even this by the issuing bank despite the fact that I had no late payments and never take on what I can’t handle.
The bank, B of A, referred me to NovaDebt, a not for profit NJ corporation.
Is NovaDebt legitimate? They offered me a payment plan on 4 cards with the highest balances (the others I did not want to include as I need to keep some credit cards and anything that goes into their payment plan gets closed and I did not want them messing with my 40 year relationship with AMEX which remains very good).
They offered a plan paying about $1660 a month for 54 months to discharge approximately $91,000 in debt. This includes their $25 a month fee but not their initial fee of $50. It sounds a little too good to be true. Based on the offer they would be paying on my behalf $88,290 after their fee. That’s about $3000 less than the principle although that number shifts constantly but lets say that total amount was the principle after I made one more round of payments directly which is something they said I had to do until I made a second payment to them while they set everything up.
This means I pay no interest and my only risk is they scam me out of my first $1660. And probably make me late in payment.
Assuming you say they are legit, what happens to my credit score by moving forward with them which today stands around 710 only because of high amount of debt and high debt ratio.
There are so many scams–including good write ups that are scam write ups.
Please Advise
Steven”
Dear Steven,
Novadebt is a mainstream non-profit credit counseling organization and so I would not be worried about the technical aspects of the debt management plan you might enroll in.
There are some risks that you should be aware of. Accounts that are included will probably be closed by the issuer. That will terminate your good credit history with those accounts.
Additionally, traditionally issuers do not like agencies to pick and choose which accounts are included and any issuer included may unilaterally change the terms they offer while you are enrolled in the program.
Concerns about the nature of the credit counseling – creditor relationship were recently raised in this lawsuit. The suit lays out how credit counseling groups have little to no control over the terms you may be offered.
If you are counting on some specific events happening, such as AMEX not closing your account once they see other accounts closing, or a guaranteed 0% interest rate for included accounts then you may be wish to get those guarantees in writing from Novadabt or any credit counseling group you may work with. I would be highly surprised if any agency was willing to put those guarantees in writing. Let me know if they do!
This is not to imply or infer that Novadebt is not a legitimate company, just that I want you to make sure you have a clear understanding before embarking.
I do question how the plan you say you were offered results in an overall payment that would be less than the debt you are enrolling. Are they settling some of your debt? If so, you need to clearly understand that before you begin, while debt settlement is a valid tool to use in certain situations, it does not come without some consequences.
Settled debt may be reported negatively for seven years on your credit report. Additionally, if you have a positive net worth after you settle your debt you may owe income tax on the forgiven amount above where you became solvent.
You can use my online calculator to review your major options to get out of debt.
I’m not sure if anyone mentioned to you during your credit counseling evaluation but an option to address your cash-flow situation may just be a peer-to-peer loan through groups like LendingClub.com to get you up to $30,000 in cash you can use as a buffer.
The advantage of this approach is that it would not close your current accounts, you can focus on paying off those debts and retain your long credit history with those creditors.
While the loan may cost you more in interest, the cost of the loan may be an expense worth incurring to maintain your good credit and not close cards you may later need.
Please post your responses and follow-up messages to me on this in the comments section below.
You are not alone. I'm here to help. There is no need to suffer in silence. We can get through this. Tomorrow can be better than today. Don't give up.
Do you have a question you'd like to ask me for free? Go ahead and click here.
- Plastic Pandemic: US Credit Card Debt Surges Nearly 20% in Q1 2021! - May 12, 2023
- The IRS Resumes Collections Notices: What You Need to Know Before It’s Too Late - May 12, 2023
- How Can I Deal With Payday Loan Debt? - May 12, 2023
Thank you so much for your answers on NovaDebt and additional suggestions.Here is what I have learned and what additional questions I have.
The NovaDebt representative was very forthcoming about my wanting to include only certain cards in the payment plan. He said that is the only thing that they will present to the banks involved but they may come back with the condition that other cards be included. At that point I am not obligated and if I don’t like what they propose I can either say no or counter-propose (to include some cards or to a faster payoff rate, this would be up to me). This seems entirely fair. I also understand that the cards being included in the plan will be closed in terms of being allowed to place further charges on those cards and this makes sense to me as we are converting revolving credit into a term loan.
In that regard I was mistaken in my calculation and the total amount of my payments over a term of 4.5 years would result in full discharge of my principle and an applied interest rate of 9.9%. That also seems reasonable but not more than that(the cards have a current weighted average interest rate of about 16.5%) But I was wrong–we are not talking about “settled debt”
But he did mention that should the cards I am excluding (which are issued by banks not involved in the payment plan) review my credit and see that I have entered into a payment plan, those cards not included could act to close my account and convert the credit cards into fixed loans. Do you know of that happening in other cases?
Finally, I took your advice and made an application to LendingClub.com. I was accepted and if I completed the paper work my loan request would go up for funding. The rate is not great if I borrow more than $14,000, despite having a credit score that was 729 on TransUnion. So it makes no sense to go this route for credit card debt consolidation as their rate is the same or higher than the rate on my credit cards for loans over $14,000. However my question is if I wanted to borrow from them at a later date for working capital. Would entering into a payment plan adversely affect how they look at me? Whatever the answer, do payment plans noted on your credit record lower your credit score?
Thanks much–Steven
Steven,
This path you are on of asking questions and seeking solutions is a good one. The more you know, the better choices you can make.
When any non-profit credit counselor submits a proposal to a creditor it sets in motion a series of events. The question if they can be reversed later is uncertain.
Generally what happens is that the proposal will trigger automatic actions by the creditor, such as account closure. That can result in a notation on your credit report that other creditors may be monitoring.
I’m skeptical about how much of that can be unwound if minds are changed.
Creditors monitor credit reports to look for signs and signals that may give them a warning that there is something going on that creates risk. Such a warning sign can lead to accounts closed by creditors if it triggers a, “What do they know that we don’t?”
Regarding your credit score, you might want to read, Why Enrolling in a Credit Counseling Program Can Hurt Your Credit Score for additional information on that subject.
Considering your business needs and objectives, I stand by my original suggestion of the debt consolidation loan. While the loan may be slightly more expensive you can condor that the cost of keeping your good credit and building it further. You’ve got to ask yourself, “How much is your good credit worth to you.”
You most certainly do not have to go the consolidation option if you don’t want. I don’t want to feel I’m forcing you to do that if you ultimately feel that’s not right for you.
Here is the bottom line, except for paying your debt off in full or in accordance with at least the minimum contractual terms, all other options have consequences and ramifications that can impact your credit score.
I don’t want you to get into a rush of feeling like you need to do something right now. I’d rather you academically evaluate your options and make a logical decision about what is best for you for today and in the near future so your business can be as successful as you feel it can be.
Quite frankly it seems the best thing for me, is to manage my own debt payments and keep control. Once I go with NovaDebt, though no fault of their own, notations made on my credit could lead to problems with other creditors. And since there isn’t a loan available out there that is big enough to consolidate all my debt so I am best off just taking a smaller loan for working capital and keep on paying on the debt. Â
At the risk of hogging your time, one last question. Do you think it possible or have you ever seen it where the debtor successfully negotiates with the credit card issuer to turn a revolving credit card into a term loan in exchange for a lower rate? Â And if so yes, which banks have you seen as amenable to this?
I can’t recall that ever happening.
You will probably get a big benefit out of using the free online tools through ReadyForZero.com to automate your self-administered debt reduction plan.
Always feel free to ask questions. I’m here to help.
Thank you so much for your answers on NovaDebt and additional suggestions.Here is what I have learned and what additional questions I have.
The NovaDebt representative was very forthcoming about my wanting to include only certain cards in the payment plan. He said that is the only thing that they will present to the banks involved but they may come back with the condition that other cards be included. At that point I am not obligated and if I don’t like what they propose I can either say no or counter-propose (to include some cards or to a faster payoff rate, this would be up to me). This seems entirely fair. I also understand that the cards being included in the plan will be closed in terms of being allowed to place further charges on those cards and this makes sense to me as we are converting revolving credit into a term loan.
In that regard I was mistaken in my calculation and the total amount of my payments over a term of 4.5 years would result in full discharge of my principle and an applied interest rate of 9.9%. That also seems reasonable but not more than that(the cards have a current weighted average interest rate of about 16.5%) But I was wrong–we are not talking about “settled debt”
But he did mention that should the cards I am excluding (which are issued by banks not involved in the payment plan) review my credit and see that I have entered into a payment plan, those cards not included could act to close my account and convert the credit cards into fixed loans. Do you know of that happening in other cases?
Finally, I took your advice and made an application to LendingClub.com. I was accepted and if I completed the paper work my loan request would go up for funding. The rate is not great if I borrow more than $14,000, despite having a credit score that was 729 on TransUnion. So it makes no sense to go this route for credit card debt consolidation as their rate is the same or higher than the rate on my credit cards for loans over $14,000. However my question is if I wanted to borrow from them at a later date for working capital. Would entering into a payment plan adversely affect how they look at me? Whatever the answer, do payment plans noted on your credit record lower your credit score?
Thanks much–Steven