If you're not careful, some debt relief agencies will just cause you more grief. Before you sign up, get the low down.
You’ve probably seen the commercials on TV and heard them on the radio: “Debt Free in 24-36 months! One Low Monthly Payment! No Home Required!”
That’s straight from an actual ad. And it’s most likely a lie. Not all debt relief agencies are scams, but many aren’t going to help you – in fact, they can seriously hurt you by wasting your time, your money, and potentially trashing your credit history. So rule number one for debt relief ads: If they’re offering you a quick, simple fix, run the other way.
I’ve been doing stories – mostly positive – on credit counseling for 20 years. In more recent years, I’ve also done stories – mostly negative – on debt settlement companies. So it’s with great satisfaction that I report the following: New rules go into effect today that make life more difficult for companies doing the most reprehensible thing imaginable: ripping off consumers seeking help with overwhelming debt: the very definition of kicking people when they’re down.
The major new rule doesn’t sound like much. In the words of the Federal Trade Commission: “Consumers trying to settle their debts will be protected by a new rule that prohibits companies that sell debt relief services over the telephone from charging fees before settling or reducing a customer’s credit card or other unsecured debt.”
That doesn’t sound like that big a deal when expressed in legalese, but it is. To why, understand how the debt settlement industry works.
Here’s how debt settlement is supposed to operate in theory:
- The consumer stops paying their credit cards and instead sends their monthly payments to the debt settlement company.
- The debt settlement company calls the credit card companies and lets them know the consumer is in a debt settlement program, thus preventing them from being harassed for not paying their bills.
- When the accumulated payments grow to an amount sufficient to make a lump-sum offer to settle the debt – say, 50% of what’s owed, the debt settlement company negotiates with the credit card company and pays off the debt.
But here’s how it often works in real life:
- The consumer responds to an ad, then is talked into a debt-settlement program by a high-pressure commissioned salesperson who gets paid for saying whatever is necessary to enroll them.
- The consumer stops paying their credit cards and instead sends their monthly payments to the debt settlement company. Since they’re no longer making any payments on their bills, their already-challenged credit score is now completely trashed.
- The debt settlement company takes hefty fees from the consumer’s monthly payments – commonly 15 percent – even though they haven’t done anything yet.
- The debt settlement company doesn’t convince the credit card company, or in many cases a collection agency, that the consumer shouldn’t be harassed. The consumer receives a tidal wave of threatening letters and phone calls. When they try to get help from the debt settlement company, nobody responds.
- Since accumulating enough money to pay off the debts in a lump sum will take years, the consumer ultimately buckles under the pressure from their creditors, drops out of the program, and agrees to pay their bills – bills which are now swollen with additional interest and fees.
- The debt settlement company doesn’t care if the consumer drops out because they’ve already made their money. The credit card company doesn’t mind because now the consumer owes even more. The consumer, however, is in a much worse position: they’ve endured enormous stress, paid big fees for services they never received, owe more money than they did before, have less money than they had before, and all they have to show for it all is higher debt and a lower credit score.
To understand more about the debt settlement industry, including a riveting video showing congressional hearings, see GAO: Debt Settlement Industry Defrauds Consumers
Back to what’s going into effect today: in order to stop the abusive practices I just outlined above, starting on October 27, debt relief agencies that solicit their services by telephone can no longer collect fees until they’ve performed a service. In their recent press release, FTC Chairman Jon Leibowitz delivers a clear message to all debt relief agencies: “If you charge consumers before actually helping them, you will find the FTC and state enforcers knocking at your door,”
This new rule comes exactly one month after a bunch of others I detailed in New Debt Settlement Rules Start September 27th. So an unregulated industry full of scammers is finally getting some law and order – at least theoretically. But since the FTC can’t be everywhere, you still need to be careful. Here’s a recap of the five tips from the video above for finding the right folks to help you with your debt…
1. Help yourself first
Many times, the most effective person to negotiate your debt isn’t a professional. It’s you. Call your creditors and simply ask what they can do to work out a payment plan. You’d be surprised how often this works. I detail how to do it in Can I Negotiate Debts Myself?
2. Ignore the ads
Like I said in the video above, the best debt relief agencies don’t waste money on splashy advertising campaigns: they can’t afford to. So how are you supposed to find reputable agencies? Her are two trade organizations representing credit counseling agencies where you can find help: The Association of Independent Consumer Credit Counseling Agencies and the National Foundation for Credit Counseling. (Full disclosure: I have a business relationship with several debt counseling agencies that are members of these organizations. I’m also on the advisory board of an agency belonging to one of them.)
3. Ask questions
You wouldn’t buy a car without asking a lot questions. Same goes with debt relief agencies. The most important: what are you able to do for me and how much will it cost? You might also ask if an agency is nonprofit, but recognize that nonprofit doesn’t automatically equal honest. Ask how the counselors are trained and if they’re certified. Ask if you can get your money back if you’re not satisfied.
The key thing when interviewing any debt relief organization is to look for someone who talks like a counselor rather than a used car salesman. A good counseling organization will discuss all your options and won’t sugar-coat your situation or their proposed cure. If someone’s trying to sell you something, you’re barking up the wrong tree.
4. Cheaper is better
Advice at quality credit counseling organizations is always free. And if you enter into any official program to pay off your debts, the fees you do get charged should be based on the amount you owe, and shouldn’t be more than $50 a month. The person you speak with should be able to explain the logic behind any fee – for example, it conforms to state law. If anything sounds vague, or they seem to be covering something up, move on.
5. Don’t ever hire help to clean up your credit history
Getting help to clear up debt is one thing. But don’t ever pay anyone to help clean up your credit history. Because there’s nothing anyone can do that you can’t do yourself. Want help cleaning up your credit history? Check out 3 Steps to Improve Your Credit History.