Debt is Not Illegal!

A chiropractor I know has over $110,000 in student loan debt incurred to get his professional degree. I’ll call him Bill for purposes of this blog.

Bill is hardworking and smart, but after a few years in the chiropractic field, it was pretty obvious to him that he wasn’t going to make the kind of living he expected, and certainly not the kind of income he would need to pay off that student loan debt and buy things like shelter and groceries. In fact, things got so tough for a while that he filed bankruptcy to discharge credit card debt he couldn’t manage. Of course, he couldn’t discharge or reduce the student loan debt in bankruptcy.

Since then, he’s been working hard in his new field (which doesn’t require his degree), and he’s looked at many avenues for dealing with the debt. He consolidated to a lower rate, but that was before rates went even lower than his consolidation rate. So he’s stuck – permanently – with that 8% rate. That rate could have been much lower if he waited to consolidate when rates dropped to rock bottom, but he could neither predict future rate drops, or afford to wait.

I want to emphasize that point. You may only be able to consolidate your federal student loans once. Is that insane? Imagine if you could only refinance a $120,000 mortgage once, and otherwise you are stuck with that rate until the loan is paid off!

Finally, Bill was approached by a company that seemed to have the answer to his prayers…a process that would eliminate his student loan debt! The company assured him that over a two-year period they could negotiate to have his debt wiped out.

Bill was pretty excited about the program, but it sounded fishy to me, so I asked Bill to conference me in on the call with the company representative before he forked over any money.

Sure enough, the company salesperson started with an argument that “debt is illegal” and that, since Bill had already paid more than the amount of the debt back, the company could call the student loan holder on its “illegal” practices and have the obligation erased. For this, Bill would pay an upfront fee of $9000!

When Bill asked for references from consumers, the representative explained that this method is hush-hush and clients didn’t really want to be bothered with calls from other consumers. (Actually, I would think that anyone who got that kind of debt erased would be singing the firm’s praises from the rooftops. I know if it worked for Bill he would be happy to recruit a thousand clients to the firm.) When Bill pressed the point, she admitted that the first clients were just starting to finish up that two year process.

Of course, I couldn’t find the company listed with the Better Business Bureau or on the Internet.

Listening to the representative’s lies and excuses got my blood boiling. I cut the sales pitch short and warned her that companies promoting these debt elimination schemes were being shut down by the FTC, FBI and other regulators.

If you are thinking of paying money for “debt elimination,” I want warn you: debt is not illegal. If anything, last week’s Congressional hearings illustrated how truly legal debt is…even when it comes to outrageous interest rates and fees!

The folks promoting debt elimination schemes are the same ones that say you don’t have to pay taxes.

Bill is going to have to pay back his student loans. There is no way out of it. He’ll work hard, he’ll struggle, and he may not be able to put a dime aside for his own children’s educations, as he tries to repay the loan for his. But he is stuck with the debt.

Keep in mind that debt elimination is different than credit counseling or debt negotiation/debt settlement. Unfortunately, when it comes to student loans, those last two options, which can be legitimate, are not available either.

The hearings on credit card practices have created quite a stir. It’s going to be time to get things stirred up on the topic of student loans again, as well.

Gerri Detweiler Credit.com's Personal Finance Expert, Gerri focuses on financial legislation, budgeting, debt recovery and consumer savings information. She is also the co-author of Debt Collection Answers: How to Use Debt Collection Laws to Protect Your Rights, and Reduce Stress: Real-Life Solutions for Solving Your Credit Crisis as well as host of TalkCreditRadio.comTalk Credit Radio. Reach Gerri at creditexperts@credit.com.