Many people face a financial crisis at some time in their lives. Whether the crisis is caused by personal or family illness, the loss of a job or overspending, it can seem overwhelming. There are legitimate strategies for dealing with difficult financial circumstances, but there are also unscrupulous entities that promise debt relief, but only deliver additional financial woes.
Distinguish between scam and legitimate assistance offer:
No matter what it is called — “debt counseling,” “debt settlement,” “credit repair” or any other name — if the advertisement for the debt relief program being offered describes it as “quick,” “easy” or “guaranteed to eliminate debt,” it is likely a scam. Watch out for these other red flags:
Be wary of any debt relief organization that:
- Charges any more than a nominal fee before it settles your debts.
- Pressures you to make “voluntary contributions.” That is just another name for fees.
- Touts a “new government program” to bail out personal credit card debt.
- Guarantees it can make your unsecured debt go away.
- Tells you to stop communicating with your creditors.
- Tells you it can stop all debt collection calls and lawsuits.
- Promises that your unsecured debts can be paid off for just pennies on the dollar.
- Refuses to send you free information about the services it provides unless you provide personal financial information, such as credit card numbers and balances.
- Tries to enroll you in a debt relief program without spending time reviewing your financial situation.
- Offers to enroll you in a debt relief program that does not include budgeting and money-management skills training.
- Demands that you make payments into a debt relief program before your creditors have accepted you into the program.
Some credit counseling organizations are legitimate non-profits that work with you to solve your financial problems. But be aware that, just because an organization says it is “non-profit,” there’s no guarantee that its services are free, affordable or even legitimate. In fact, some credit counseling organizations charge high fees, which may be hidden, or urge consumers to make “voluntary” contributions that can cause more debt.
Credit counselors may offer services through local offices, the Internet or on the telephone. If possible, find an organization that offers in-person counseling in your community. Many universities, military bases, credit unions, housing authorities and branches of the Cooperative Extension Service operate non-profit credit counseling programs. Your financial institution, local consumer protection agency and friends and family also may be good sources of information and referrals.
Reputable credit counseling organizations can advise you on managing your money and debts, help you develop a budget and offer free educational materials and workshops. Their counselors are certified and trained in the areas of consumer credit, money and debt management and budgeting. Counselors discuss your entire financial situation with you, and help you develop a personalized plan to solve your money problems. None of them will ever tell you that the solutions to your credit problems will be “quick” or “easy.” An initial counseling session typically lasts an hour, with an offer of follow-up sessions.
Debt management plans
If your financial problems stem from too much debt or your inability to repay your debts, a credit counseling agency may recommend that you enroll in a debt management plan (DMP). A DMP alone is not credit counseling, and DMPs are not for everyone. You should sign up for one of these plans only after a certified credit counselor has spent time thoroughly reviewing your financial situation, and has offered you customized advice on managing your money. Even if a DMP is appropriate for you, a reputable credit counseling organization still can help you create a budget and teach you money management skills.
In a DMP, you deposit money each month with the credit counseling organization, which uses your deposits to pay your unsecured debts, like your credit card bills, student loans and medical bills, according to a payment schedule the counselor develops with you and your creditors. Your creditors may agree to lower your interest rates or waive certain fees, but check with all your creditors to be sure they offer the concessions that a credit counseling organization describes to you. A successful DMP requires you to make regular, timely payments and could take 48 months or more to complete. Ask the credit counselor to estimate how long it will take for you to complete the plan. You may have to agree to refrain from applying for — or using — any additional credit while you are participating in the plan.
Debt settlement programs
Debt settlement differs from credit counseling or DMPs. With debt settlement, no regular periodic payments are made to your creditors. Rather, the debt settlement provider promises to negotiate a lump sum to resolve the debt at an amount less than you currently owe. This can be very risky, and have a long term negative impact on your credit report and, in turn, your ability to get credit.
Some debt settlement companies may claim that they can arrange for your debt to be paid off for a much lower amount – anywhere from 30 to 70 percent of the balance you owe. For example, if you owe $10,000 on a credit card, a debt settlement company may claim it can arrange for you to pay off the debt for less, say $4,000. Only rarely are these claims accurate. Any debt settlement company that claims it successfully resolves most or all of the debt for most or all of its customers is likely lying.
Debt settlement firms often pitch their services as an alternative to bankruptcy. They may claim that using their services will have little or no negative impact on your ability to get credit in the future, or that any negative information can be removed from your credit report when you complete their debt negotiation program. The firms usually tell you to stop making payments to your creditors, and instead, send payments to the debt negotiation company. The firm may promise to hold your funds in a special account and pay your creditors on your behalf.
There is no guarantee that the services debt settlement companies offer are legitimate. There also is no guarantee that a creditor will accept partial payment of a legitimate debt. In fact, if you stop making payments on a credit card, late fees and interest usually are added to the debt each month. If you exceed your credit limit, additional fees and charges also can be added. This can cause your original debt to double or triple. All these fees will put you further in the hole.
While creditors have no obligation to agree to negotiate the amount a consumer owes, they will provide information to the credit reporting agencies, including your failure to make monthly payments. That can result in a negative entry on your credit report. And in certain situations, creditors may have the right to sue you to recover the money you owe. In some instances, when creditors win a lawsuit, they have the right to garnish your wages or put a lien on your home. Finally, the Internal Revenue Service may consider any amount of forgiven debt to be taxable income.
Fair Debt Collection
People may be unable to meet their credit obligations for reasons as varied as over-extension of finances to unemployment and illness. Whatever the reason, and regardless of the circumstances, no one should have to endure abusive or deceptive collection practices and every consumer is afforded protections by the federal Fair Debt Collection Practices Act. Personal, family and household debts are covered by the Act. This includes money owed for the purchase of an automobile, for medical care or for charge accounts.
Limitations on contacting consumers:
- A debt collector may only contact a person between the hours of 8 a.m. and 9 p.m.
- Debt collectors may not contact a consumer at work if the debt collector is aware that the employer prohibits such calls.
- A person may notify a debt collector in writing if he or she does not want any further contact with the collector. Once this notice has been received, the debt collector must stop all communications, except to notify the person that a specific action will be taken.
- A debt collector can discuss your debt only with you, your attorney, a credit bureau, the creditor and the creditor’s lawyer. However, the debt collector can contact other people to find out where the debtor lives or works.
Forbidden debt collection practices:
- Debt collectors may not harass, intimidate, threaten or embarrass you.
- Debt collectors may not make false or misleading statements, such as falsely associating themselves with a government office or credit bureau.
- Debt collectors may not use misleading or false threats of imprisonment or criminal charges.
If you believe a debt collector is violating the Act, take the following steps.
- Keep detailed records of any communication you have with the debt collector, including time, date, and the name of the person with whom you spoke.
- Keep a copy of all written correspondence between you and the debt collector.
- Report the debt collector in writing to the Attorney General’s office, the Federal Trade Commission, or Arkansas State Board of Collection Agencies.
- Depending upon the conduct of the debt collector, you may have the right to sue the debt collector yourself. You may want to talk with a private attorney of your choice to discuss your options.
National Association of Consumer Advocates — Includes tips on dealing with debt collectors and information on rights and expected practices