Imagine this scenario:
Last year your spouse was laid off, cutting your family income in half and leaving your family without health insurance. You slashed all unnecessary expenses and were getting by barely on your income alone until your child was hospitalized for a tonsillectomy. Now, past-due bills are piling up.
Sick of nasty dinnertime phone calls from creditors and letters threatening to foreclose on your mortgage, you seek out the help of a non-profit debt counseling service. They promise to work out lower interest rates for your outstanding bills and even get some of the amounts permanently reduced. But six months later, after paying the agency's sign-up charge and monthly fee, you're deeper in debt than when you started. In fact, the only party that seems to be in better shape is the counseling service itself.
How did this happen?
Call it good ol' capitalistic ingenuity, filling a need, or simply a scam: the combination of high household debt levels and major corporate layoffs in the past few years has led to a sharp increase in the number of organizations that claim to help folks with debt problems.
The Federal Trade Commission (search) 's Joel Winston says there has been a "significant increase" in reports of abusive practices in the past year or two. Typically, credit counseling agencies have been small, localized services that exist primarily to service consumers, providing advice and education about budgeting and managing debt. Depending upon an individual's circumstances, they were steered into debt management programs or, in extreme cases, bankruptcy.
"More recently," says Winston, "a new kind of agency has arisen." Instead of being locally-based, these agencies are national. And, he adds, "they pitch their services aggressively," advertising on television, in magazines and over the Internet.
"Traditionally, credit counselors didn't do a lot of self-promotion, " says Winston. "As long as the advertising is truthful, we don't have a problem with it."
But much of it is misleading, if not downright false. For instance, the part about being "non-profit." That's gotten the attention of the IRS and state watchdogs who oversee charities.
Mark Pacella is an attorney in the Pennsylvania Attorney General's office and president of the National Association of State Charity Officials (search). He says when people see the word "non-profit" they drop their guard and automatically think the organization has only the consumer's best interest at heart.
"People who find themselves in financial difficulty really should know who they're dealing with. Understand what the fee structure is, be suspicious of fees that seem to be based on percentages or commissions, " he says.
If a commission is involved, how much is it? Who pays it, the consumer or the credit card company? Pacella warns," If the agency gets a kickback from the credit card company based on how much of the debt is re-paid, there's the potential for this to influence the advice you get."
The commission kicked back to the credit agency could range from 5 percent to 15 percent of the amount paid. Clearly, in this kind of an arrangement it's not in the credit counselor's best interest to get your debt reduced. They also have "a financial incentive to keep you in a payment plan and not advise you to file for bankruptcy, even if this might be appropriate," says Pacella.
Legitimate credit counseling agencies offer their services at minimal cost -- just enough to cover their expenses. That's why they qualify for "non-profit" status. The FTC's Winston says that, typically, upfront fees run around $20-$30, with a monthly fee of around $10. If they determine you can't even afford that, they will often waive all charges.
The new breed of credit counseling agencies charges significantly higher fees -- as much as $100 to sign up and $40-$50 a month.
"The counseling service might talk about 'voluntary contributions,' says Winston, "when in fact they automatically deduct their fee from the payments you send in and consumers don't realize it. They're misleading people because their charges are hidden."
Winston, who heads the Division of Financial Practices at the FTC, says the following are potential tip-offs that the credit counseling agency you're dealing is more interested in lining its own pockets than helping you reduce your debts:
- They guarantee they can eliminate your unsecured debt or promise they can pay it off for pennies on the dollar.
- They advise you to stop making payments to your creditors.
- They don't offer any education or guidance so you can avoid getting into financial trouble again.
- They automatically pitch their (fee-based) re-payment plan without considering your individual circumstances.
- They promise to clean up your credit report, removing any negative information it contains.
The latter is "absolute misrepresentation," says Winston. Comments in your credit history about late payments or defaults stay on your record for 7 years. It takes 10 years to eliminate a bankruptcy filing.
"If you think you're a victim, find out exactly what you're paying," he advises. If you're not sure, take your contract "to a trusted advisor -- a bank, friend, relative, or legal aid office. Ask them to help you figure out what you're being charged. Usually, there's a way to get out of the contract." Fraud, for instance.
But don't stop there. File a report with the local Better Business Bureau (search) or your state's attorney general's office. Contact the Federal Trade Commission. As a law enforcement agency, it can't fight your battle for you, but Winston says, "We'll use the complaints we get as a basis for broader action." In other words, if they receive enough consumer complaints about a particular company, they can move to shut it down.
You can reach the FTC by phone: 1-877-FTC-Help (toll-free), via the Internet: http://www.ftc.gov , or through the U.S. mail: FTC, Washington, D.C. 20580.
If you're looking for help managing your debt load, shop around. Talk to a couple of different organizations. Ask questions about the costs. Winston says you might also want to check to see if the agency is a member of the National Federation of Credit Counselors (search), an industry group which sets minimum standards that members have to meet.
NASCO's Pacella points out that because of their non-profit status, consumer protection laws are often ineffective against unscrupulous credit counseling firms. But one route regulators can take is to revoke their "non-profit" status if they determine that their motives are less than charitable.
FTC says it expects to make some major announcements in the coming weeks in its effort to crackdown on these operators.
I'll keep you posted,
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