Many consumers with credit card balances hanging over their heads are searching for an easy way out. Alas, nothing is easy, and you eventually pay for what you bought, but…
What if you want a path to reduce or eliminate debt and get in control of your money?
Should you try a debt settlement companies, debt management services, or credit counselors? First, be aware that many of these companies charge fees, which can be steep. The Federal Trade Commission announced a new ruling that takes effect October 27, which will ban many of these for-profit companies (non-profits not included yet) from collecting advance fees for debt relief.
FTC chairman Jon Leibowitz said, “This rule will stop companies who offer consumers false promises of reducing credit card debts by half or more in exchange for large, up-front fees. Too many of these companies pick the last dollar out of consumers’ pockets – and far from leaving them better off, push them deeper into debt, even bankruptcy.”
Three other FTC provisions to limit these companies’ telemarketing sales will:
• require debt relief companies make specific disclosures to customers;
• prohibit them from misrepresenting, and
• extend the telemarketing rules to cover calls consumers make to these types of firms, in response to their advertising.
Before you hire a company/individual to get rid of your debt, make sure you know the difference between basic three options and what it means for you in the future. (For example, if you pay less of your credit card debt, it usually means a lower credit score. It might also affect your income taxes.)
1) Debt settlement companies typically charge a hefty fee to you (perhaps 15% of amounts you owe) and start a process, negotiating with your creditors so you partially pay your debt and the rest is not paid. (You can start the same process on your own by calling your creditors and asking for a reduction or by hiring an attorney.) Basically, the creditors are settling for less than you owe, which will make them mad, enough to ding your credit score.
2) Debt management services charge you a fee, and you make one monthly payment to them, from which they pay your creditors. They may have worked out a schedule with your creditors for lower payments and lower interest. Or, they may just have extended your terms so it appears you are paying less. There are hundreds of debt management companies springing up and the FTC has found that some have deceived and defrauded consumers.
3) Credit counselors are a third option. They usually offer free services and mediate between you and those you owe. They call your creditors to negotiate lower interest rates and waive finance fees. You may have to take budgeting classes. You end up with a monthly payment and someone who will put you on a debt diet, possibly cutting up your credit cards. But just because you get these service for little, if any, fees, that doesn’t mean the credit counseling company isn’t getting paid to put you into a debt counseling program with regular payments.
To find such counselors near you, check with the National Foundation of Credit Counselors or the Association of Independent Credit Counseling Agencies.
Get more information at the FTC.