Get rid of debt fast and easy, for pennies on the dollar. If the deal sounds too good to be true … well … you know the drill.
As the jobless rate climbs, many people find themselves falling behind on credit-card bills, struggling with living expenses and bogged down with a mortgage or car payment.
Consolidating debt through a credit negotiator may sound appealing, but experts urge caution in this economic environment ripe for scammers.
Sometimes unscrupulous companies will ask for an upfront or monthly fee, saying they can renegotiate your debt, but what they actually do isn’t clear, said Kim States, interim president and CEO of the Better Business Bureau of Southern Arizona.
In the meantime, if you’re not paying minimum fees on credit cards, your credit score plummets.
“You end up in further in debt because you’ve paid this scam artist the money and nothing happened,” States said.
It’s a lesson that one Sierra Vista woman learned the hard way.
Christina Rawl, a 36-year-old disabled Army veteran, said she lost her job about a year ago and bills started piling up. She and her husband had about $20,000 in debt on five credit cards, a mortgage and two car payments.
She went online and found a company called Clear Your Debt LLC. The company started taking $500 out of her account every month.
“The way I understood it, I was saving money, and while I was saving the money, they were negotiating with credit companies,” she said.
But Rawl said those negotiations never took place, and she is now being sued by two creditors.
Her husband, who works for the federal government, is now having his wages garnisheed.
David Jones, president of the Association of Independent Consumer Credit Counseling Agencies, said what typically happens is the negotiating company claims it can settle the debt for 20 or 30 cents on the dollar.
In the meantime, the debt consolidator takes hundreds of dollars from your account every month and purportedly puts it into another account to pay off the renegotiated debt.
Consumers don’t realize that sometimes the company will first collect its fee, so no money is used to pay any bills for several months. The creditors will then go to a collection agency or take legal action because of the unpaid bills.
Depending on the terms of the contract, such action may be legal, but “it’s certainly unethical,” Jones said.
Calls to Clear Your Debt, based in Austin, Texas, were not returned.
Consumers have filed 136 complaints with the BBB against Clear Your Debt in the past three years, said Erin Jones, a spokeswoman for the BBB that serves Central, Coastal and Southwest Texas.
The company has a rating of F, the lowest on the BBB’s grading scale, because consumers complain they get enrolled in the program when they think they are only applying for eligibility, Erin Jones said. Consumers also complain about the lack of communication between the company and its customers’ creditors, she said.
The BBB has concerns with the debt consolidation industry in general, Erin Jones said.
“A lot of these folks are very vulnerable because of the desperate situation they may be in, and it’s very important that customers take their time and understand what they’re signing,” she said.
In Southern Arizona, there has been a marked increase in complaints about debt consolidators.
Last year, the BBB of Southern Arizona received 1,733 inquiries about debt consolidation companies, a 90% increase from the previous year.
In Arizona, the Attorney General hasn’t taken legal action against any debt consolidation companies, said spokeswoman Anne Hilby. But she said consumers should still be diligent about researching a debt negotiator, so they don’t end up in a worse situation.
The Pima Council on Aging has also seen a spike in the number of people calling its office with financial concerns, officials said. They refer people to one of three nonprofits with local offices.
Nonprofits get money from fees paid by customers and from contributions from the creditors themselves, said David Jones, of the AICCCA. Reputable for-profits do exist, he said.
States, of the local BBB, said whether the company is nonprofit or not, consumers should check them out and make sure they have a local office with a physical address.
And Jim Murphy, the CEO of the Pima Council on Aging, said if consumers are going to enter into a debt consolidation program they need to make sure they’ll have enough money to pay back that debt. And they need to be careful to read the fine print because there may not be any recourse.
“There are some groups who are doing things legally,” Murphy said. “But they’re not moral.”
Steps to Become Debt-Free
Step 1: Set up a household budget.
Examine monthly income and expenses. If expenses exceed your income, you need to boost your income or cut expenses to bring the totals in line. Cutting discretionary spending — restaurants, entertainment and travel — is the first place to start.
Step 2: Don’t go deeper in debt.
Put credit cards away and pay cash or use a debit card. If you must charge something in an emergency, use the card with the lowest interest rate.
Step 3: Find small ways to save money.
Forgo the daily coffee; take public transportation; use coupons; eat home-cooked meals; seek out lower-priced auto insurance; cancel your cable TV; or switch your cell phone provider.
Step 4: Correctly prioritize debt repayments because not all carry equal weight:
Pay off high-interest rate balances first. Review the interest rates and terms of payment for each credit card. Pay double or triple the minimum monthly payment each month on the credit card with the highest annual percentage rate until its balance is paid off then apply payments toward the next highest-rate balance. In the meantime, make the minimum due payments on remaining cards.
- Consider transferring balances to the lowest-rate card.
- If you must miss a payment, carefully consider which debt is most important. Ignoring your mortgage or rent payment could cost your home. Your car loan may be critical if you’re dependent on transportation for your job.
Step 5: Ask creditors to reduce interest rates or for a new payment schedule.
Be honest about your challenges and assure them that you’d like to remain a loyal customer.
Step 6: Make extra payments whenever possible.
Step 7: Contact a credit counseling agency if your efforts are not successful.
Source: Better Business Bureau
Warning signs that you may be dealing with a questionable debt negotiator:
- Demands that you provide account numbers or other financial details before it will discuss its services or fees. Reputable credit counseling will provide free information about their services.
- Boasts it can “lower your monthly payments by 30% to 50%,” which is rarely true.
- Promises that it can “get you out of debt easily.” Avoid counselors who promise a quick fix.
- Avoid any agency that claims it can evaluate your situation in just minutes, or that offers to do so quickly over the phone. Experienced counselors may want to spend an hour reviewing your financial situation.
- Claims it can remove negative information, such as bankruptcy, from your credit report. Accurate information cannot be removed from a person’s credit report.
- Issues a blanket recommendation for a debt-management plan. The plans-which pay down debt through monthly deposits to the credit counseling agency-are not for everyone. Do not agree to establish one unless and until you have reviewed your personal situation with a certified credit counselor who recommends such a plan and then customizes the plan to best manage your debt.
- Reluctance to provide the organization’s business name and address.
- Insists upon an immediate decision.
Source: Better Business Bureau
How to Choose a Debt Adviser
The Association of Independent Consumer Credit Counseling Agencies urges consumers to consider the following when considering a credit counselor:
Third party accreditation, which demonstrates that the counselor meets industry standards.
Certified counselors: Counselors have undergone training and met financial education guidelines.
Non-profit agency. They generally work toward the best interest of their customer, but it’s not the sole criteria to judge an agency.
Good customer-service record. Check with the local Better Business Bureau or Attorney General’s Office to find agencies with few or no complaints.
Full disclosure of policies and operations. All services, procedures and fees should be outlined in writing before entering into any agreement.
Reasonable fees.
A reputable agency won’t charge a large upfront fee or request a voluntary contribution such as the first month’s payment of a debt management plan. Fees should not exceed $75 to set up a debt management plan or $50 per month to maintain the plan. If the consumer is unable to pay fees, the agency should be willing to work at no cost to the consumer.
Copyright © 2009, The Arizona Daily Star, Tucson
Distributed by McClatchy-Tribune Information Services.
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