Beware easy answers to debt problems
© St. Petersburg Times
"Get rid of your debts!" "Get creditors off your back!"
The enticing promises arrive in an endless stream of e-mails and TV commercials. A whole industry feeds off the woes of the debt-burdened consumer. Some of what the companies offer can be genuinely helpful in the right set of circumstances. But the unwary consumer easily can end up in an even worse situation.
"All of these offers that sound too good to be true usually are," said Deanne Loonin of the National Consumer Law Center in Boston, co-author of two books on debt. "A lot of companies are trying to offer a quick fix for complicated problems."
Most of the companies doing counseling and debt management are set up as not-for-profit organizations, including the traditional consumer credit counseling agencies affiliated with the National Foundation for Credit Counseling.
But some of the newer companies stretch the definition of not-for-profit with their ties to for-profit ventures that process debt payments or make consolidation loans.
"Just because it's a nonprofit doesn't necessarily mean that it's a worthwhile company," Loonin said.
Before signing up for help, consumers need to take an honest look at their finances, she said.
"If you're pretty organized and are on top of things, you often can do a lot of this on your own," Loonin said. Other people may owe so much that bankruptcy is a better alternative, she said. "Bankruptcy will not make your credit record any worse than some of these things."
The companies promote five basic types of help:
* Education and counseling. Many people end up in financial trouble because they don't know how to manage their money wisely. Workshops, brochures and individual counseling may be useful if you need help creating a budget or managing cash flow.
* Debt management. Instead of juggling monthly payments yourself, you may be able to make one payment to a company, which then will disburse the money to creditors. Some creditors will reduce the interest rate or adjust payment schedules for program participants. Typically this program is limited to unsecured debts, such as credit card debts. If you have debts that cannot be included, signing up may not offer much of an advantage.
* Debt negotiation. Companies offer to negotiate settlements with your creditors, something that people can do for themselves, although it can be a hassle. A settlement for less than you owe gets a creditor off your back, but may be more damaging to your credit than bankruptcy.
* Debt consolidation. You can pay off your old debts with a new loan, possibly at a lower interest rate. Often consolidation reduces the size of the monthly payment but extends the payments over a longer period, making it more costly in the long run. If you consolidate with a home equity loan, your home could be lost to foreclosure if you default on your debt.
* Credit repair. This is a major area for fraud, with companies falsely claiming they can wipe the slate clean. They cannot legally do anything that you could not do for yourself by getting copies of your credit reports, correcting errors and explaining your side of disputes.
Except for some educational programs, the services are not free; consumers and credit card companies foot the bills.
Credit card companies pay debt management companies, including the consumer credit counseling agencies, a percentage of the debt collected. Fifteen percent was once the standard for debt management services, but that figure has declined to less than 8 percent in recent years. In response, many companies have raised their fees to consumers. Some keep the entire first month's debt payment in addition to collecting hefty ongoing fees.
"They charge different amounts, and you need to shop around," Loonin said.
She said consumers should find out what services they are getting and what those services cost before they sign up. She said she favors companies that offer face-to-face counseling rather than dealing with consumers by telephone or over the Internet.
Some companies claim that they can get consumers a better deal from creditors than other companies can, but "So far we don't have evidence of that," she said. In fact, she said some concessions, such as lower interest rates, may be available to consumers who request them directly from a credit card company.
Loonin said consumers also need to know how their money will be handled. She said debt negotiators sometimes hold onto money for an indefinite period. "In the meantime, you're past due on everything."
Paul Richard, executive director of the Institute of Consumer Financial Education in San Diego, recommends avoiding debt negotiators. He said he is concerned about the potential for fraud.
'If you've got yourself into that kind of difficulty, rather than go to debt settlement, you might just as well get it legally taken care of through bankruptcy court," he said.
-- Helen Huntley can be reached at firstname.lastname@example.org or (727) 893-8230.
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