June 3rd, 2006 09:00 EST
I'm In Debt And I Can't Get Out! Help!
Consolidate your debt! Debt-free in 18-36 months! Get a home equity loan!
All over the Internet, and just about anywhere you look, the good, the bad, the ugly, and the downright lowdown in the consumer debt counseling business are popping up everywhere. The Federal Trade Commission has seen a flood of companies that claim they can lay your debt to rest eternally. How do they work and how can you avoid being bitten by a company that can smell blood in the water?
The good: Debtors who are late on their accounts can bring them current without having to make back payments; and the late and over-limit fees can be stopped. Legitimate debt management services consolidate high interest, high balance accounts and find a way for you to keep some of your cards for essentials like business, travel or emergencies.
The bad: Many companies claim to be non-profit when they are not. AmeriDebt received $170 million in hidden fees before the FTC finally shut them down in response to numerous consumer complaints. The scam involved telling debtors they could get out of debt without paying upfront fees and then deceived them into making voluntary contributions. " After collecting monthly payments from clients, rather than send them to creditors, as promised, the funds were funneled into for-profit companies. Clients of AmeriDebt experienced credit ratings that worsened and bill collectors who still called. AmeriDebt`s accounts have now been turned over to a reputable debt counseling agency, " through a third-party bankruptcy trustee.
Note: AmeriDebt had also failed to notify clients of their right to privacy as required by the Gramm-Leach-Bliley Act.
The ugly: The new bankruptcy laws. In a nutshell, Chapter 7 filings will be almost impossible to get if you have a job. You will be required to pass a means test showing that your income is less than the median income for the state in which you live. Mandatory Chapter 13 repayment plans will require attorneys to double-check consumer income/debt information, which will exponentially increase attorney fees; and this, too, will require a means test that will allow creditors to collect, over five years (instead of three), as much as they would have received had you filed a Chapter 7 and gave back the assets. And the biggest kicker? The new law requires mandatory debt counseling, which means more agencies like AmeriDebt could pop up.
The downright lowdown: The use of payday loans, which often make bad situations worse. (see my article, I`ll Pay Later.) The APR for these loans is typically usurious; even when state laws cap interest rates, the payday lenders will usually contract with a banking institution in another state that doesn`t have a cap, thus charging interest rates that can`t be regulated by the state in which you live; rollover loan fees can surpass the loan amount itself; collection techniques for small-time lenders are aggressive; and if you don`t pay them off immediately, these types of loans tend to be vicious cycles that can`t be untangled without judicial remedy.
Ten (10) clues that the debt counseling agency may not be legitimate:
a) The promise of lowered payments. Payments cannot be lowered. Only the interest rates can be lowered.
b) The offer of "debt settlement` services. You don`t need them. You can do that yourself. Just pick up the phone, call your creditors and see what they are willing to negotiate with you.
c) Non-profits and profits are the same. You will not get a better deal with a non-profit organization.
d) They ask for account numbers before giving you a quote. This is not necessary.
e) Promises to negotiate charged-off accounts. This is usually not possible, and if so, this can also be done without the help of a credit counselor.
f) It is a jack of all trades and master of none. True debt counseling agencies can`t wear too many hats at once because the business is highly specialized and calls for intense focus that doesn`t allow much time for lots of other add-on services.
g) They advise you to include accounts with low interest rates that may end up going higher because they don`t really know what they are doing.
h) They advise you to include student loans. Student loans usually charge the lowest non-adjustable rates available and are not negotiable.
i) They advise you to include state or federal tax liens. Tax liens are another area and need to be handled exclusively by a tax attorney.
j) Group quotes together rather than giving you a breakdown of how each creditor will be handled, which leaves you with no idea of how long it will take to pay off each account.
There are numerous other ways to check a debt consolidation company before they check you. Some thoughts are:
Be aware that reputable credit counseling organizations do not charge upfront fees or ask for voluntary contributions for their services. They advise on money management and debts, budget development, and should offer free educational materials and workshops.
Counselors should be certified to discuss your entire financial situation and help develop a personalized plan to solve your money problems. A reputable credit counseling agency should not require you to provide any details about your situation; and there is no such thing as being approved " for services.
Once you have a list of potential counseling agencies, check them out with your state Attorney General, local consumer protection agency, and Better Business Bureau. (Just because there are no complaints doesn`t guarantee they`re legitimate.)
Ask questions like: What services do you offer?, " How much do you charge for your educational materials?, " May I have a full disclosure in writing of all fees that you charge?, " What happens if I can`t afford your fees?, " Will there be a formal written contract?, " Are you licensed to do business in my state?, " Are your counselors certified and by whom? "
Learn to swim with the sharks without being eaten alive. Do your homework. You can start your pre-counseling research at: http://www.nfcc.org/