How To
Tell If Credit Counseling
Service Is Legit
By Robert K. Heady
Bank Rate Monitor
When
a credit counseling company offers to help you settle debts with
your creditors, how can you tell whether it's legit or a scam
operation?
How much will it really
cost you? Have you shopped around to find the best deal?
Nowadays, more than
1.5 million consumer debtors go the credit-counseling route to
get out of debt and stave off bankruptcy, accounting for an estimated
$8 billion paid back to creditors last year. Yet, the average
person knows zilch about how the system operates behind the scenes.
"It's buyer beware,"
warns John C. Gormley III, a straight-arrow operator who runs
the national Consumer Credit Management Services in Delray Beach,
FL (800-568-4545). "When people are desperate, they're vulnerable
to scams. And a lot of companies try to disguise themselves to
sound legitimate."
The cost can range
all over the lot. For example, one company charged a client,
Robert R., and "enrollment fee" of 5 percent of his
$20,000 of debt, or $1,000, then had him commit to a monthly
payment of $800 a month to trust account that earned Robert no
interest. Money in the account kept piling up, yet no settlement
was offered to his creditors until they eventually cried "wolf!"
Whereupon the creditors got paid.
On top of that, Robert
paid the agency a $25 "monthly maintenance" fee, plus
a $5 monthly bank fee. When the debts were finally erased, the
company also charged him a "settlement fee" of 25 percent
of the amount by which each creditor claim was reduced. If, for
instance, they saved him $2,000, they pocketed $500.
One big myth, says
Gormley, is how most credit counseling agencies work with creditors.
"Consumers think we negotiate everything. Not true. Virtually
all the major creditors have pre-existing terms and conditions
that apply to all of the agency's clients. Typically, between
1 and 4 percent of total amount owed becomes the monthly payment.
So if a consumer owes $10,000 in bills, his monthly payment is
between $100 and $400."
However, the terms
can vary by creditor. Reportedly, Bank of America sometimes will
reduce a credit card interest rate to zero while Sears won't
budge on its original rate. Citibank and Chase Manhattan also
were said to be among the most lenient to deal with. And MBNA,
the credit card giant, now wants to see consumer's entire financial
profile before it arbitrarily decides on a payback arrangement.
Keep in mind that there
are four main approaches to debt management:
- Budget you way out of it But it requires more discipline than most people have.
- Borrow your way out Aren't you just digging a deeper pit?
- Use a credit-counseling agency It may prevent bankruptcy, but investigate the company first.
- Bankruptcy It remains on your record for 10 years.
If it's a go, you arrange a payment date on the 5th, 15th or 25th of every month, sign an agreement, and pay a one-time $20 start-up fee. The agency also charges $3 per month per creditor that's it.
Most important, take these steps before you do business with any credit-counseling outfit:
1) Check to see if they're a member of either the National Foundation for Credit Counseling (301-589-5600) or the Association of Consumer Credit Counseling Agencies (703-934-6118). "If so, you've probably eliminated 90 percent of the scams," says Gormley.
2) Better Business Bureaus are fine, but I suggest you see if the agency belongs to the local Chamber of Commerce. If not, watch out.
3) Is the agency a non-profit corporation? the best ones are. Call the state's department of corporations.
4) Does it have listed phone number? Can you visit their offices? If not, stay away.
5) Get a complete list of fees and charges in black and white, including initial fee, plus fees for application, processing and maintenance. If they won't give you one, walk.
Editor's Note: Robert K. Heady is the founding publisher of Bank Rate Monitor and is the co-author of the book, "The Complete Idiot's Guide to Managing Your Money." You can e-mail him at jrnl8888@aol.com.
