Photo by Andrew Brusso
|
On the Money
Debt Relief: Beware the Frauds
By Jordan E. Goodman, May & June 2007
Can you cut debt in an instant? Don’t believe it. But real counseling will show you a way out
|
More On the Money Columns
Linda and Jerry Gleason* of Riverside, California, never thought they’d need help getting out of debt. Last year Linda, 60, was working at the same health clinic she’d been with for 16 years, with no plans to slow down. Jerry, 59, had spent his whole career at General Motors. Then Jerry took an early-retirement buyout without carefully calculating his financial needs. Months later Linda’s hours were cut in half when the health clinic was hit with a big funding cutback.
The Gleasons started putting daily expenses on credit cards, and the $10,000 debt they’d been carrying climbed. A late payment lost them their best interest rate, and now they are facing $25,000 in debt, at rates as high as 23 percent. They know that letting their finances slide further and declaring bankruptcy isn’t an attractive option, and even if they were willing to do this, a 2005 revision of federal bankruptcy law makes it harder to escape debt repayment for those with assets and income.
The Problem Like many Americans, the Gleasons need a financial life raft, but they don’t know where to find one. Appealing to credit card issuers got them no improvement in terms. Typing “debt relief” at Yahoo’s online Yellow Pages brought up almost 200 listings, many promising to wipe away 40 to 90 percent of their credit card debt. That kind of instant relief, called debt settlement, sounds too good to be true—and usually is.
Debt-settlement outfits do get some creditors to accept pennies on the dollar by warning that clients could exhaust their assets and leave the creditors hanging. This high-pressure approach may sound like a distressed consumer’s best hope, but here’s what’s wrong with it. First, not all of your creditors are likely to go along. Second, when a creditor does buckle, the unpaid portion of your debt doesn’t disappear. It can be reported as bad debt, delivering another blow to your credit score, and the IRS counts forgiven debt as taxable income, so you could end up owing Uncle Sam.
And it’s not just debt settlement that can get you in trouble when seeking credit counseling. Year after year shady operations are exposed by the Federal Trade Commission. Sometimes the targets are industry leaders. The FTC charged AmeriDebt Inc. with deceiving nearly 300,000 clients by giving the impression it was a nonprofit, then keeping $170 million its clients believed was payment on their debts. In a legal settlement last year, AmeriDebt’s owner, Andris Pukke, was barred from credit counseling and debt management forever.
Step 1: Get real help For the Gleasons, as for all consumers, the right course is to sidestep quick-fix counselors, who can do more harm than good. In fact, consider it a red flag if an agency promises to resolve your problems in 15 minutes or less.
What you need are a few minutes more—45 to 90, preferably face-to-face—in which a credit counselor learns your whole situation and lays out the alternatives. Start with the referral services listed at the end of this article. Choose two to four conveniently located agencies, then put them through their paces on the phone.
In those exploratory calls ask about their services and what records—of income, mortgages, medical bills—you’ll need on hand to give your counselor a full picture. Consider it another warning sign if you’re told you don’t need any papers at all. Yes, you’re in need, but remember, you’re looking for comprehensive advice, not a risk-laden shortcut.
Of course you’ll want to know how much the services cost. Consultations are usually free (and should be completely confidential). Credit-counseling services make their money by arranging and administering debt-management plans, or DMPs. Unlike a quickie debt settlement, DMPs will get your credit rating moving in the right direction. Agencies create these plans by negotiating with creditors for reduced interest rates; agencies charge clients a monthly fee or a percentage of what’s owed.
DMPs can be a fine solution, but they’re not ideal for every debtor. Some agencies push clients toward DMPs when simple budgeting might help just as much.
Keep in mind, too, that if you aren’t satisfied with the agency you choose, you can try another. To register complaints about an agency, get in touch with the FTC, your state attorney general, your state securities regulator, or the Better Business Bureau.
Step 2: Make a broad plan A good counselor will start by helping a family do the necessary accounting to figure out what they really owe—the more bills there are, the harder it is to keep track—and see if there are daily spending cuts to make. Every dollar counts.
If a strict budget won’t stop debt from mounting, it’s time to consider moving to a much cheaper place, in the same town or elsewhere. You should also sell assets of significant value that you may not need, including furniture and housewares. Use those proceeds to pay down debt.
The Gleasons, determined to pay their debts, found an agency they liked and (after a ten-day wait for an appointment) got the thorough, in-person financial checkup they needed. Together with their counselor they concluded they should sell a tapestry but don’t have to sell their home or trade in their second car for something cheaper. A DMP, while not an automatic solution, made sense in their case. The agency got them reductions on credit card interest rates, to 3 percent and 6 percent. They’ll pay the entire debt in five years and in the meantime have a penny-pinching budget that should keep them out of trouble. And if it doesn’t—they’ll know where to go for help.
Jordan E. Goodman has written 11 books on personal finance, including Everyone’s Money Book on Credit (Kaplan, 2002). His website is www.moneyanswers.com.
*Names changed for privacy.
Where to Turn
Getting comprehensive credit counseling can take some persistence because it’s impossible to tell at a glance which agencies are best. Being a smart consumer means comparison-shopping. If you’re filing for bankruptcy, you’ll be required to get counseling mandated under the 2005 bankruptcy law for anyone seeking to file for Chapter 7 or Chapter 13 protection. Agencies must apply to the Department of Justice to do this counseling.
For a list of pre-bankruptcy counselors, go to:
U.S. Trustee Program (202-514-4100)
With the rate of filings rising recently despite the new bankruptcy law’s tougher stand on debt repayment, counselors at these firms may be pressed for time. But those aren’t the only pressures on credit counseling. Funding for nonprofit counseling has dropped in recent years as lenders have trimmed or eliminated subsidies. By one estimate, the number of counseling agencies has slipped from more than 800 two years ago to fewer than 650.
For lists of nonprofit credit-counseling services in your area, go to:
National Foundation for Credit Counseling (800-388-2227)
Association of Independent Consumer Credit Counseling Agencies (800-450-1794)
Submit your question to the On the Money column.
|
