Image by upsuportsmouth via Flickr
If you get nowhere negotiating with your creditors, you’re drowning in debt, you’ve analyzed your budget, cut back on expenses, have implemented the suggestions found in Zero Debt, and have still concluded there’s no way you can afford to pay all your obligations, the good news is that a debt management program may help. The bad news is that many of them might also hurt you.
Credit Counselors: Friend or Foe?
Every year, about nine million consumers seek help from debt counseling agencies. The typical person in a debt-management program earns about $30,000 a year, is college-educated and has credit card debts of about $16,000. Obviously these individuals are in a bind. Unfortunately, the very places they go for help – credit counseling agencies – sometimes make their situations worse. In recent years, complaints about the credit counseling industry have skyrocketed, according to the Better Business Bureau. The IRS recently audited some 50 credit-counseling agencies to see if they deserve their tax-exempt status. And guess what? Many of them got their tax exempt status revoked.
The Federal Trade Commission and five state Attorneys General in 2003 sued AmeriDebt and its founder, Andris Pukke, accusing them of misleading 400,000 customers and charging clients $170 million in hidden fees. AmeriDebt went out of business, Pukke went bankrupt, but in 2006 the FTC won a $35 million settlement in the case. However, in 2007, a judge found Pukke in contempt of court for hiding assets, after the FTC alleged that Pukke had made only about $10 million in restitution.
Meanwhile, two other companies, Amerix and Cambridge Credit Counseling, were investigated by a Senate subcommittee. Although they denied wrongdoing, Congress nevertheless recently examined many debt management companies for a variety of alleged wrongful practices including:
- taking clients’ money and then not paying their bills
- charging unreasonably high start-up/monthly fees
- not disclosing to consumers what fees are going to the debt management company and how much towards bills
Shop around and you’ll find that some debt consolidation companies make outrageous claims, even going so far as to promise they’ll “fix” your credit report virtually overnight. “Any quick-fix company is probably too good to be true,” said Fair Isaac spokesman Ryan Sjoblad.
For these reasons, you need to be especially careful about choosing a credit counseling or debt management company. The credit counseling industry continues to grow by leaps and bounds. Just do a Google search on the phrase “credit counseling” and you’ll get roughly 8.7 million hits. Ditto for the term “debt management.” And because Congress passed a federal law requiring anyone who files bankruptcy to first receive debt counseling, the industry is poised for even more explosive growth.
In picking a credit counseling agency, at the very least you should make sure that any company you do business with is on the Department of Justice U.S. Trustee Program list of approved credit counselors. These firms have been vetted, somewhat, and are approved to provide you with pre-discharge bankruptcy information and post-bankruptcy credit education. Any legitimate credit counselor will be on the U.S. Trustee list. If an agency isn’t listed, don’t do business with them. You can find a list of approved credit counselors in your areas by logging onto this website: www.usdoj.gov/ust/eo/bapcpa/ccde/cc_approved.htm.
The main problem with the $7 billion debt management industry is that, over the past decade, it has undergone a drastic transformation that is not in consumers’ best interests. Let me tell you about the roots of this industry and explain how it now operates. Then I’ll tell you the Do’s and Don’ts of using a debt management program, in case you decide you need this service.
Next – Day 26: Weigh the Pros and Cons of Debt Management Plans (Part 2)
