You are not alone — during the economic downturn, many people are struggling with debt. Debt management can be scary or confusing. Many fraudulent companies exist that seek to exploit consumers who are having a difficult time with debt management. These companies make their programs sound as if they can magically transform your life, when actually they are worsening your financial situation.
There are no easy ways or quick fixes for getting out of debt. A legitimate credit counseling organization should take time to understand your income, expenses and tailor a plan to your particular needs. Companies that offer quick and easy debt consolidation or debt settlement, and promise lower interest rates or lower monthly payments without a repayment plan, are often not reputable.
Understand Your Options
Debt settlement companies promise you quick results to get out of debt. They typically advise people to stop paying their bills altogether and instead save enough money to negotiate a lump-sum payoff of the debt owed. Debt settlement companies will often charge 14-20% of the amount owed to contact creditors to negotiate a settlement. Many organizations, such as the Consumer Federation of American (Don’t Get Caught in the Debt Settlement Trap) and the MN Attorney General (Beware of Debt Assistance Scams), warn consumers not to use debt settlement/negotiation companies. If you follow the advice of a debt settlement company to stop paying your bills, you will likely incur late fees, pay interest-upon-interest, and your account will be turned over to a debt collection agency. This may ruin your credit and some of your creditors may file lawsuits against you or garnish your wages and/or bank account.
Payday loans are short-term loans, with hefty finance charges, that are designed to allow people to borrow against an expected paycheck or other income. Payday loans are often marketed as “one-time-only” loans to get by until your next paycheck, however many people find themselves trapped in a downward spiral of debt as they take out additional loans, accrue greater interest and finance charges and owe more and more.
Debt consolidation combines all unsecured debt into a single loan or payment obligation. This is often done to secure a lower interest rate, secure a fixed interest rate or for the convenience of servicing only one loan. A Debt Management Plan is one form of debt consolidation. Taking out an additional loan from a bank is another form of debt consolidation. There are many types of debt consolidation options - it is extremely important to understand all the costs and terms before making a decision, signing an agreement or paying any fees!
Another option is the Debt Management Plan (DMP). Unlike the other three options, debt management companies are required to be licensed and are highly regulated and monitored. LSS Financial Counseling Service is one of these agencies. Under a debt management plan, you deposit money each month with the credit counseling organization, which may work with your creditors to lower your interest rate or waive certain fees. The credit counseling organization then uses your deposits to pay your bills, which may include credit card bills, car loans, medical expenses and other debts. The credit counseling organization should work with you and your creditors to establish a payment schedule. The goal of a debt management plan is to repay the money that you owe through periodic payments.
Warning Signs to Avoid Scams
Here are some warning signs that an organization may not be reputable.
If promises a company makes seem too good to be true — they probably are. A company that “guarantees” to lower your monthly credit card or loan payments, or to reduce payments by 50% or more, may not be reputable.
Never stop making payments based on verbal promises. Beware of any company that tells you to stop paying your creditors. If you stop paying your creditors altogether, you may ruin your credit, have lawsuits filed against you and have your wages or bank account garnished.
Requests for payment up front
If a debt assistance, debt consolidation, debt settlement or credit repair company offers you a deal that requires you pay an upfront fee, not only is it fraud — it’s illegal.
As of October 27, 2010, the Federal Government banned debt assistance companies (including credit repair companies, debt consolidation companies, and debt negotiation companies) from collecting any up-front fees before they deliver a service. Before a debt assistance company can collect a fee, it must resolve at least one of the consumer’s debts. The debt assistance company must also tell you the truth about how much it will cost; how long it will take you; and that if you fail to pay your creditors, it may damage your credit report or lead to legal action. Don’t work with any company that is not in compliance with the law.
Money Back Guarantees
In order to address customer concerns, some debt assistance, debt settlement, credit repair or debt consolidation companies may promise a money-back guarantee. These agreements, however, are often not worth the paper they’re printed on. Don’t let a guarantee lull you into a false sense of security. Be sure to do your due diligence on the company despite their guarantees. Check with the Better Business Bureau (BBB) or you state’s commerce department.
Choosing the Right Company
Checking a few simple things, could save you from getting scammed.
Check a program’s credentials
Start by checking to see if the company is licensed to do the service you’ve chosen them for. Debt management companies must be licensed (in Minnesota, licensing is done by the Minnesota Department of Commerce). Consumers should never do business with a company that is not registered with its appropriate state commerce department.
Also, check with the company’s local Better Business Bureau to see if any major complaints have been made against the debt assistance, debt consolidation or credit repair company.
Know the fees
Some debt assistance companies charge fees up front and/or monthly fees to enroll for credit counseling, debt management, debt consolidation, credit repair or a settlement plan. Take time to know what your total costs will be and what services you will be getting. Research to see that you are not paying more to the debt assistance company than you need to be. Is the debt assistance company taking money that would be better used paying your bills?
Check the fine print
Many debt assistance, debt settlement, credit repair and debt consolidation companies have you sign written contacts before they’ll work with you. Read the contract carefully to make sure that it matches all verbal promises and offers you’ve been given. You should read the fine print of the contract, and if the contract says something different than what you’ve been told in person — do not sign it!
Conversely, make sure all verbal promises are also in writing.
Understand the outcome
You should understand exactly how much it will cost you, when fees are due, and what the outcome will be. What interest rates will you be paying creditors? How long will it take to pay down your debt? Will your creditors reduce your lump-sum payments? Will the company take its fees before money is paid to your creditors?
It’s important for you to understand the mechanics of your agreement, so that you can make the best decisions for your situation.