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Asking for help when you have too much debt and not enough money isn't easy. But if you trust the wrong company, getting help could be downright dangerous to your wallet and your credit rating. A slew of credit-counseling and debt-consolidation companies looking to make a quick buck by preying on stressed-out, financially vulnerable consumers have opened shop. Some companies are guilty of shoddy service and sky-high fees. Others are out-and-out scams.
It's easy to see why. As a nation we're wrestling with more than $744 billion in credit card debt. Toss in a sluggish economy and rising unemployment and it's no wonder so many American families are turning to these types of companies for help. But you'll want to choose that help carefully.
Marilou needed help with more than $30,000 in credit card and store card bills. In July, she called Gibson Trust Inc., based in Pompano Beach, Fla. "They said they would deal with the creditors. The creditors would lower the interest rates and in three years my debt would be paid off," she says. All she had to do was send a monthly payment to Gibson Trust and they would pay her creditors. Only they didn't.
"I sent almost $2,500 and nothing went to my creditors. They took all my money," she says. "I think they paid about $40 to Wal-Mart and that's about it." Gibson Trust has been charged with violations of the state's Deceptive and Unfair Trade Practices Act by the Florida Attorney General. Marilou's credit rating took a beating. By November, creditors were calling and demanding four months of missed payments.
The mother of two, who had never missed a payment before, now has black marks all over her credit. And because several of those unpaid accounts were joint accounts, her husband's credit is marred as well. Their credit score, which once topped 800, has fallen below 500.
More and more Americans are walking away from debt-counseling companies unsatisfied. Some, like Marilou , leave with deeper financial wounds than when they started.
Complaints against credit-counseling agencies and credit-management companies have skyrocketed in the past three years.
In 2000, complaints against credit counseling and management agencies totaled 404 and complaints against debt-consolidation companies reached 653, according to the Council of Better Business Bureaus. In 2002, in e-mail traffic alone, 1,055 consumers lodged complaints against counseling agencies and another 1,819 consumers complained about debt-consolidation companies for a total of 2,874 complaints. This does not include written and phoned-in complaints made that year. In 2004, the mounting complaints reached the ears of state and federal officials. The Massachusetts Attorney General's office sued Cambridge Credit Counseling Corp., alleging that the "agency funneled millions of dollars to insiders and misled consumers into paying high fees." It also reached a $650,000 settlement with a Florida-based telemarketer, Integrated Credit Solutions, Inc., of Fargo, Fla., which officials accused of misleading consumers into buying high-cost credit counseling services.
At the federal level, House and Senate committees held hearings into the profitable nature of some in the nonprofit credit counseling industry. The Senate's Committee on Governmental Affairs titled its scathing report, "Profiteering in a Nonprofit Industry: Abusive Practices in Credit Counseling." Two federal agencies took aim at one of the largest national independent credit counseling companies, AmeriDebt Inc. The Federal Trade commission sued the Germantown, Md.,- based firm, accusing it of deceptive practices. In September, the IRS got into the act, according to the Washington Post, which reported (registration required) that the tax agency had hit the company with a claim of $15 million. It is one of 50 companies whose tax-exempt status is being reviewed.
What's the fuss about? High fees and the questionable handling of debt-management plans. Most debt-counseling agencies are nonprofits that get much of their financial support from the credit card industry. They offer an array of services, including debt-management plans. When you enroll in a debt-management program, you write a monthly check to the credit-counseling agency and the agency pays your creditors. In a typical debt-management program, a card issuer will charge lower interest rates, stop charging late fees and contribute money to the debt-counseling agency. A debt-management plan usually lasts three to four years. The consumer generally gets reduced interest rates, lower monthly payments, no more late fees and fewer calls and letters from bill collectors. Debt-counseling agencies get their operating money by receiving a percentage of each client's payments back from creditors.
But some debt-management programs aren't on the up and up. Some agencies charge upfront fees as high as 3 percent of a consumer's total debt. Other agencies pocket the first month of credit payments for themselves. So right off the bat, you're a month behind. The result? Your credit accounts get slammed with late fees and penalty interest rates. "Instead of you being current, you're a month behind," says a vice president of consumer affairs for Experian. "A lot of consumers are getting surprised by that. If it's in the fine print, they're not reading it."
To stay current, you would have to pay your monthly credit bills on your own on top of the agency's hefty, upfront fee. That means two months' worth of creditor payments in a single month. "That's very difficult for someone in debt and struggling to do," says a representative of the Association of Independent Consumer Credit Counseling Agencies (AICCCA). "We consider that to be a very unscrupulous practice." And how's this for an unscrupulous practice -- some agencies fail to make payments to their clients' creditors on time or at all, resulting in more late fees and penalties for consumers.
There are reputable agencies
Now there are plenty of reputable credit-counseling agencies that assist people with all kinds of money problems. They also charge low fees for debt-management programs and other services. They include members of the AICCCA and the National Foundation of Credit Counseling, the oldest network of nonprofit counseling agencies. The AICCCA caps enrollment fees for debt-management plans at $75. Monthly service fees are capped at $50. Many member agencies charge fees well below these caps. Members of the NFCC, whose agencies are mostly known as Consumer Credit Counseling Services, charge an average enrollment fee of $19 and an average monthly service fee of $12 to clients that enroll in debt-management plans.
So it is possible to find a cost-effective, debt-management program. But it's also important to realize that a debt-management plan is not the best strategy for everyone with debt woes. At the NFCC only about one-third of all clients qualify for a debt-management plan. Only about one-quarter of clients of AICCCA enter plans. Some over-the-phone counseling companies try to push everyone that calls into a debt-management plan. "They're not doing counseling. They're doing enrolling," says an investigative administrator in Maryland. "They're collection services turned upside down." And collecting your money is their primary goal.
"The first thing they want is authorization to take money out of your checking account from day one," says a certified credit counselor with Consumer Credit Counseling Service of the East Bay. Don't be persuaded. "Firms that simply shove you into a debt-management plan because that's how they make their money are doing you a disservice if not outright ripping you off," one says.
Some people simply can't afford a debt-management plan. Between the high fees and the monthly payments, they have nothing left to live on. Wagner has seen instances where half of a client's Social Security check was eaten up by an ill-advised debt-management plan. For other people, cash flow isn't a problem. Getting a handle on their debt is. One client who had $2,000 left over each month after he paid his monthly bills and other living expenses. But he signed up for a debt-management plan anyway. It made things worse. The company he chose didn't pay his credit bills on time and he was getting slammed with late charges from all his creditors.
Some nonprofits charge high fees. f you think you'll steer clear of this kind of trouble by choosing a nonprofit counseling agency, think again. Some nonprofits charge high fees and others are run by people looking to line their own pockets. Investigations have uncovered big salaries for nonprofit executives as well as some rather dubious relationships between nonprofit counseling agencies and for-profit businesses, including payment-processing companies. In a few cases, the same person ran the counseling agency and the for-profit business. In other instances, a nonprofit agency's executive was steering business to a for-profit company run by a relative or crony.
So regardless of what all those warm and fuzzy ads might say, not every nonprofit counseling agency has your best interest at heart. Consumers immediately let their guard down and think they're all good guys, and they could be funneling money to a related, profit-making company.
Wondering why there isn't a law to keep debt-counseling companies in check? There is, at the state level anyway. About half of the 50 states have some kind of licensing requirements for debt-management companies. But most of these states exclude nonprofit agencies from these requirements. The laws for the most part are very general and often make the assumption that if it's a nonprofit it's OK. And since there's no federal oversight of counseling agencies, it's very much consumer beware when it comes to selecting credit management help. Research nonprofits as you would any other business. There's no guarantee that their business practices are legitimate.
Remember your credit record is your responsibility.
Not sure how to choose a credit-counseling agency or debt-management company?
Tip No. 1 is to comparison shop. You'll want to check out services and fees carefully. Just like everything else, shop around. You should be able to get decent, affordable credit counseling without paying several hundred dollars a month. Get information on fees at the beginning. Avoid companies that charge a large fee and promise to return it upon completion of a debt-management program.
Get the facts because everything should be disclosed upfront. The costs of service should be straightforward and reasonable. Don't forget to ask about services beyond a debt-management plan and debt consolidation. Is a free budgeting session available? What kinds of fees are charged for any additional counseling services? The service should go beyond consolidation of debt because providing budgeting advice and education is also important.
How is the counseling agency or company funded? Be aware that not every nonprofit agency has your best interests at heart. Some nonprofit counseling agencies charge high fees and others are run by people looking to line their own pockets. Nonprofit doesn't mean cheap or affordable, or even good. Delve beneath the surface and check the reliability and reputation of the company.
Contact the Better Business Bureau to see if the firm has had any consumer complaints. Check with your state attorney general's office or other state consumer agencies to find out if there are any pending legal investigations. Is the agency accredited through an independent, third-party association such as the Council on Accreditation? Are counselors certified? If not, what kind of training do they have? Members of the National Foundation for Credit Counseling and the Association of Independent Consumer Credit Counseling Agencies are all accredited agencies with certified counselors.
How much time is the agency willing to spend with you to discuss your particular financial situation? Don't let anyone pressure you into a quick decision. Do they spend a lot of time with you, or are they shoving a debt management plan at you within the first 10 minutes? No matter what anyone says, there are no quick fixes when it comes to credit problems. Be skeptical of companies that promise otherwise.
And you don't need to pay a credit counselor to receive a new payment plan from a creditor. You could simply call a credit card company and ask for help on your own. All they can do is say no. You can call these banks directly because they may have an in-house program that would do a debt reduction."
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Small minds cause
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