When Debts Mount: Legitimate VS Scam Debt Counseling Services

Cassie married Ron to love and to cherish in sickness and in health until death did them part. They expected to have long, full lives together, but when Ron’s car was struck by a drunk driver, the unthinkable happened: He died leaving Cassie a widow at twenty-nine. Despite being steeped in shock and grief, the reality was that Cassie still had bills to pay. She had a secure job, but realized that even with the emergency money she and Ron had put aside, it wasn’t going to be long before she would be treading water financially and then drowning in bills as the sole payer of the mortgage, utility charges, car payments, student loan repayments, health insurance premiums and credit card charges. She and Ron had talked about term life insurance, but they had never gotten around to doing anything about it.

Marriage can be a costly affair.

Cassie’s bills mounted and her income was stretched to the breaking point between her various creditors. When she found herself forced for the first time to make only the minimum payment on her credit cards, she knew she needed to do something to get her finances back on track. To keep from going deeper into debt, Cassie decided to sell the home that she and Ron had purchased together when they had had high hopes of filling it with children’s laughter. As she was seeing to the details of sprucing up her home before listing it for sale, the housing market began to plummet. Helpless and worried, she watched the resale market spiral downward along with housing values. Before she knew it, she was upside down in her mortgage meaning that she owed the bank more than her house was worth.

Cassie needed help and exert advice. A friend suggested she see a debt counselor and gave her the name of a reputable company. Lucky for Cassie, the counselor to whom she was referred was a legitimate professional who was instrumental in helping her keep her financial head above water and preserving her good credit rating. Even though Cassie was fortunate to have found a true professional, the fact that she recognized her need for help before she was besieged by creditors played a huge part in the satisfactory outcome.

If your financial crystal ball, gut instinct or mathematical calculations tell you that you are alarmingly close to going into the red and you are not disciplined enough to create a workable budget that you will stick to or you don’t know how to work out a repayment plan with your creditors or you are losing track of your mounting bills, you should consider debt counseling sooner than later to avoid the slippery slope of wrecking your credit and facing possible financial ruin. The sooner you act the better. If you are already hearing the sound of creditors banging on your door, waste no time in making an appointment.

Credit Repair Scams

In your haste to make an appointment with a debt counselor, don’t overlook your homework. The recent downturn in the economy and the demand by consumers for debt counseling, abetted by the lack of federal regulation, has brought out the worms like a bad storm. With so many in need and no regulation, the climate is ripe for any scam artist to open a debt counseling service. These crooks will take your money instead of helping you conserve it, leaving your credit rating in worse condition than when you started. Watch out for:

• So-called non-profits that charge hidden fees. These companies charge no upfront fees thereby claiming non-profit status—really a ruse to present a benevolent appearance—but the hidden fees that you will encounter along the credit-counseling path will leave you high and dry with your credit much the worse for wear.
• Credit repair shops that claim they will clean up your credit in order to help you secure a loan, a better mortgage or better insurance rates for an upfront fee, of course. These companies will tell you that they have a means of getting around the system—implying a legal loophole—which they offer to share with you. Often, clients are promised outlandish services like the removal of late payments from a credit report or the creation of a new credit report that is as pure as the driven snow. One such scam involves obtaining an EIN (Employer Identification Number), also called a Federal Tax Identification Number normally used to identify a business entity, which the client is then directed to use, instead of a social security number, when filling out credit application forms. Another ploy, piggybacking, adds the client’s name to someone else’s excellent credit account. The timely payments made by the original account holder then show up on the client’s credit report and by default improve the client’s credit score.

Don’t be tempted by these scams. First of all they are illegal and secondly, these scams do not deliver what they promise; the fees charged will simply push you further into debt. Worse, you could get yourself into serious trouble because it is a federal crime to lie on a loan application or to apply for and use an EIN under false pretenses. If you claim ignorance, you will simply be told that ignorance of the law is not a justification for illegal behavior. Finally, no person or entity can remove negative information from your credit report if it is accurate information. For example, if you indeed failed to pay your mortgage on time or missed several payments, those irrefutable facts cannot be removed from your credit report. On the other hand, sometimes mistakes are made on credit reports and if you can prove a mistake has been made, it will be corrected.

Legitimate Credit Counseling Services

There are many valid consumer credit counseling firms that offer legal, professional services; the trick is to know the difference between the legitimate and illegitimate ones.

A professional firm offers education and debt management counseling by trained professionals who will meet with you in person. Some offer phone or online counseling, but at the very least, make you first meeting a face-to-face interview. A debt counselor will review your debts, income and expenditures, teach you how to set up and manage a budget, help you work out a repayment plan with your creditors and so on.

Another service provided by legitimate counseling firms is a Debt Management Plan (DMP). In short, a DMP is a plan worked out by the firm to repay the client’s creditors on his behalf. The client sends a monthly amount to the firm and in turn, the firm distributes it to the client’s creditors according to the DMP and the prior agreements established between the firm and the various creditors. There is a monthly fee for this service.

Evaluating a Credit Counseling Service

Many people benefit from the general services offered by a legitimate consumer debt counseling service, including a DMP, but not everyone needs a DMP. The choice is yours. Before you hire or continue working with a particular service, be aware of the following:

• You can locate an approved counseling agency at www.ust.cc.help@usdoj.gov
• If a firm seems to push its main resource product, a DMP, and does not offer debt management advice and counseling think twice about using them.
• Make it clear to the counseling firm that you do not want any hidden fees or surprises nor do you want to be signed up for a DMP unless you specifically agree in writing. (There have been consumer complaints about companies that have signed up clients without their consent and automatically deducted the fee from the client’s charge account.)
• Check to make sure that the company will pay your creditors on time and not necessarily according to their own schedule, such as once a month. You don’t need late fees on top of everything else.
• A good counseling service will spend at least 30 minutes discussing your financial needs with you before offering any advice. As mentioned above, if a DMP is proposed early, go elsewhere. A normal session lasts 60 to 90 minutes.
• Know that the fees that are charged for a DMP are usually composed of a $75 set-up fee and thereafter a monthly administration fee that should not exceed $40 and be wary of firms that charge more.
• If you decide to go with a DMP, you will need to stay involved by calling your creditors to see if your bills are being paid on time and to confirm for yourself that they have agreed to the DMP. Stay alert and be part of the process.
• You need to know that your credit report will reflect the use of a debt management service next to every credit account entry. Even though this may not directly impact your overall credit score, the next time you apply for a loan the lender may ask you specific questions relative to why you needed a debt management service in the first place and how you plan to proceed in the future with regard to repaying the loan for which you are applying.
• * It is absolutely essential that you check out the following websites: www.ftc.gov (Federal Trade Commission) for consumer information on counseling services; www.bbb.org (Better Business Bureau) for alerts on debt counseling companies; and www.nfcc.org (National Foundation for Credit Counseling) and www.aiccca.org (Association of Independent Consumer Credit Counseling Agencies) to see if the company you are using or are considering is a member.

Professional debt counseling can be an effective lifeline for those who are overwhelmed by the state of their finances and for the most part, the companies that offer these counseling services have the consumer’s best interests at heart. However, it bears repeating that because of today’s economic climate, the increased demand by consumers for assistance with debt reduction, and the lack of industry oversight and regulation, there are a few disreputable companies and scammers that have slipped through the cracks. The lesson here is: Caveat emptor, let the buyer beware.