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Often, people going to a debt management or credit counseling firm are at their most vulnerable, which unfortunately makes them easy prey for dishonest companies anxious to take what little they have left.
But experts say there are steps these potential victims
can take to avoid being ripped off by predatory firms. Asking the right questions
and checking with regulatory agencies and local consumer organizations can make
the difference between success and tragedy. Mike Sullivan,
director of education for Take Charge America, a credit counseling firm in Phoenix,
offers three questions that consumers should ask before they sign anything. 1.
Will you handle my account throughout the process or transfer it to another agency?
Sullivan warns some credit counseling agencies have "back office" arrangements.
"The nonprofit credit counselor signs people up, but
a for-profit business takes the checks and makes the payments," he says.
"The processing company is unlikely to provide ongoing counseling or education,
but is probably quite good at moving money." 2.
Are there any charges or penalties for stopping the plan for any reason?
Sullivan has seen that few people who sign up for debt management plans, or DMP,
stay on. He says many of them get tax refunds, home equity loans or gifts and
pay off early. Others get into trouble and simply stop paying. He cautions that
fees collected upfront to cover a long period of time can make a DMP quite expensive. "At
least one agency once had a cash back plan. They collected more than was
required, then would return part of the amount paid at the end of each year. A
client wanting to exit after nine or 10 months would forfeit money. There
are different schemes for penalizing clients who don't complete a plan." 3.
How long will you hold my money before transmitting it to my creditors?
"At one time it was quite common for credit counseling agencies to hold funds
for 30 days before making payments to creditors," Sullivan says. "This
could be an effort to earn interest off the money or it could indicate a shortage
of cash. "Whatever the reason, late payments generate
late charges, increased interest costs and notices on credit reports. If funds
are not transmitted within seven days of receipt, there is an extra cost to the
client that should be considered."
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- Is your organization nonprofit?
- How are you funded?
- How are funds dispersed to creditors?
- How are your employees compensated? Do they get a commission?
- How long will the counseling take?
- Are the counselors certified?
- Will I have a formal written agreement or contract with you?
- Are you licensed to offer services in my state?
- How will you secure my personal and financial information?
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