It would be nice if we could put our bills under the pillow at night and the debt fairy would sneak in and pay them while we slept. The truth is if there's a debt professional lurking around the house at night, he is probably there to repossess the car.
In the absence of magical money fairies, there are dubious debt resolution companies that advertise their ability to negotiate consumer debt reduction by 50% or more. Charging fees based on a percentage of the debt owed (usually 13% to 20%, but sometimes as much as 35%), settlement companies may also charge a monthly fee ranging from $19 to $89 per month. It is not uncommon for these fees to add up to thousands of dollars.
Although such debt relief programs may seem quick and easy, the National Foundation for Credit Counseling (NFCC) and the Association of Independent Consumer Credit Counseling (AICCCA) warn it doesn't always work out that way. In fact, in some cases consumers wind up in a deeper financial hole than when they started.
"If it seems too good to be true, it probably is," says Gail Cunningham, vice president of the National Foundation for Credit Counseling. This month, the agencies released information designed to educate consumers about the fine print in debt resolution fairy tales.
"The NFCC and AICCCA are encouraging consumers to thoroughly investigate and understand any debt resolution option before making a decision," she says. "Keep in mind that it's up to you to do your homework before doing business with anyone, particularly if it involves your finances." For WalletPop, Cunningham outlined the NFCC's top tips for consumers who are considering a debt resolution company:
Do your homework
"Check with the Better Business Bureau and your state Attorney General to see if there are any unresolved complaints against the company you are considering doing business with," she says. Similarly, each state has an attorney general's office responsible for questions related to consumer protection, conduct a Google search of your state's name and "attorney general" for contact information.
Do pick up the phone! Don't stop talking!
"Call your creditors" says Cunningham. "They want to help you find a way to repay your debt." You might be able to avoid a middleman (and their fee) by negotiating a reduced payment plan yourself. It's worth a try. In fact, Cunningham said some companies ask clients to stop communicating with their creditors, according to the NFCC this is a major, "Don't." Think carefully before signing with a company that asks clients to do this. "Don't agree to stop communicating with your creditors either by phone or by mail," said Cunningham.
Do know who you owe
"Be aware that some creditors don't work with all companies offering debt resolution services," she says. Make sure the company you decide to work with is a good match for your needs.
Do get everything in writing
Obtain all disclosures in writing, including a good faith estimate of costs and fees associated with the debt repayment program.
Do know your exit strategy
Inquire about your right to cancel the program and to receive refunds of any money on deposit should you wish to drop out of the program.
"Get help from a legitimate source sooner than later," says Cunningham. "Delaying only digs a deeper hole and makes finding a solution even more difficult." To find someone to talk to, or list of resources, check out NFCC.org. or visit www.DebtAdvice.org.
Don't believe everything you hear
"Just like your mother told you, if it seems too good to be true, it probably is," says Cunningham. "Do not believe promises that are made verbally but not in writing."
Don't pay upfront
"Don't pay fees upfront before any service is delivered." According to the NFCC, some settlement companies collect a large part of their fee before the consumer receives any benefit. It can be months after the process has been started before the creditors receive any payment.
Don't abandon your bills
"Don't agree to stop paying your bills." The NFCC explains that some settlement companies suggest that consumers stop paying the creditors and instead make deposits into a special third-party account. In its latest consumer release, the organization writes: "The settlement company will attempt to negotiate a settlement offer with your creditor once enough money relative to the debt is on deposit. This may take six months or more ... during this time, the balance on your debt can continue to grow if interest and various penalty fees continue to be charged by your creditor. As a result, you may owe more than when you started and your credit may suffer ... Even worse, legal actions such as wage garnishment or a judgment may be filed against you during this time."
Don't be bullied
"Don't be pressured into signing up for a program before you're allowed time to read the contract," said Cunningham. Equally important, she said, "don't sign anything you don't fully understand."
Don't ignore the elephant
"Don't ignore the problem," said Cunningham, "It's not going to resolve itself."
Cunningham said it's also important to realize that even after a consumer hires a settlement company to help resolve the debt, that person can still be sued or have their wages garnished. In addition, if a creditor "forgives" $600, the consumer will be taxed on that amount as if it were income. This substantially reduces the total savings from the debt settlement.
Debt paid through a settlement is also noted on a consumer's credit report as "Paid by Settlement." This means future lenders will be aware that repayment did not cover the total debt owed and the creditor accepted a lesser amount.
Ultimately, Cunningham said it's important for consumers to understand how they got into debt in the first place. "Understand what got you into the financial distress, and do what it takes to change the situation." Otherwise, Cunningham notes, "consumers risk making the same mistakes over and over".
Finally, the NFCC encourages consumers to have patience. "Realize that you didn't get into debt overnight, so it may take some time to dig out" said Cunningham, " Promises of quick fixes are usually promises that aren't kept."
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The do's and dont's of settling on a debt resolution company