By Michelle Singletary
Hunderds of thousands of people overwhelmed with debt – often credit card debt – are turning to non-profit credit counseling agencies that have become as ubiquitous as ATMs. But just like fast access to your cash, getting out of debt quick and easy isn't always good for you.
Many of these counseling agencies, and I use the word “counseling” loosely, have been set up merely to collect fees from debtors in exchange for negotiating an easy once-a-month debt repayment plan. They do little if any debt counseling, so many people end up right back in credit card trouble.
Other credit counseling agencies may be classified as non-profit, but they aren't in business for the public good. They are often hooked up with profit-making ventures, such as companies that make debt consolidation loans.
In fact, so many of these operations are questionable that the Internal Revenue Service, Federal Trade Commission and state regulators recently teamed up to warn people about the problems that can occur when using an unscrupulous credit counseling organization.
For example, some debtors end up paying high fees to set up a debt repayment plan. Others end up with worse credit records than before they sought help because the credit counseling agencies don't pay their clients' bills on time – or at all.
The IRS, FTC and state agencies are urging consumers to be cautious when choosing a credit counseling organization. They recommend the following: Don't be in such a rush to get your debts settled that you fail to read your contract.
Understand exactly what services are being offered. If you are promised anything, get it in writing. Watch out for outrageous claims. For example, one credit counseling organization I found on the Internet is promising that people can pay off their credit card debt for 50 cents on the dollar. “I find that hard to believe,” said Lydia Sermons-Ward, senior vice president for marketing and communications for the National Foundation for Credit Counseling. “Most creditors are taking consumers though an enormous amount of scrutiny before they even reduce interest rates or over-the-limit charges.” Credit card companies are rarely, if at all, settling for less money owed, she said. Don't go for the hustle that the fees the organization requires are “voluntary contributions.”
Either a fee is required or it is not. Watch out for high monthly service charges. Most agencies now charge fees to set up a monthly debt management program, also known as a debt consolidation plan, or DMP. Some agencies now charge as much as a full month's consolidated payment – usually hundreds of dollars – simply to establish an account. In general, if the set-up fee for a debt management plan is more than $50 and monthly fees are more than $25, go elsewhere. However, if extensive credit counseling or other services are being offered, then higher fees may be appropriate. Don't believe that an agency can remove legitimate negative information from your credit report.
It is illegal for any organization to represent that negative information, such as a judgment or bankruptcy, can be removed from your credit report. Most negative information remains on your credit report for seven years. A bankruptcy stays on for 10 years. Don't sign up for a plan and do nothing to check whether your creditors are receiving their money.
You can do bad all by yourself. Missed payments by the credit counseling agency can still be reported to the credit bureaus. Don't neglect to do some homework.
For example, call your local Better Business Bureau to find out if the credit counseling organization you're thinking about using has had a history of problems with clients. Go to the Web site for the National Association of State Charities Officials (www.nasconet.org
) and find the state agency that has oversight of charitable groups in your area. Check to see if any complaints have been filed against the non-profit.
The IRS says it plans to look at many of these credit-counseling organizations to see if they are truly non-profit. IRS officials are concerned that some credit counseling organizations that might have qualified for tax-exempt status are really operations that automatically spit out debt plans like ATMs dispense cash.
If an organization's primary function is to steer people to fixed debt payment plans without offering significant education and counseling, it doesn't qualify for tax-exempt status, the IRS said in a statement.
Of course, there are many legitimate credit-counseling groups whose mission is to help people get out of debt and stay out of debt.
But I'm glad the IRS is on this case. It's about time. Maybe the agency will eventually weed out the greedy groups that just want to collect fees with little regard for people's financial well-being.
However, until the bad players are gone, if your credit mess stems from your spendthrift ways, get some serious financial counseling. Otherwise, your fast track out of debt won't last any longer than the $20 you're always getting out of the ATM.