Sylvia Mitchell, 46, of Raleigh, North Carolina, a single mother of two, lost her job as an airline ticket agent in September 2005. From there “everything went downhill,” she says. Sylvia, who could only find part-time work following her layoff, couldn’t keep up with her bills, so she began “living on credit cards.”
Before long, Sylvia was in well over her head. “I was up to a balance of nearly $7,000, and paying interest rates as high as 39.99 percent on seven different cards,” she says. “I realized that I was going to have a very hard time ever paying that off and I became very depressed.”
In today’s economy, Sylvia’s story is far from unusual. Americans hold an estimated 610 million credit cards, and the average household with credit card debt carries a balance of nearly $16,000.
With so many people owing so much, a large debt settlement industry has emerged. By way of unsolicited phone calls and advertisements on radio and television—usually late at night when the debt-ridden presumably are sleepless—these companies make promises of fast, painless relief. “We’ll cut your bills in half!” the ads promise. But, as the old adage states, if something sounds too good to be true, it usually is. According to a recent investigation by the Government Accountability Office (GAO), the debt relief industry is rife with fraudulent and deceptive practices that often leave people only more in debt, sometimes facing multiple lawsuits and bankruptcy.
Here’s what’s behind those promises of miraculous debt reduction. First, the firms tell you to stop paying your bills. After your creditors haven’t been paid for several months, the strategy is for the debt settlement attorneys to go to your creditors and offer them a lump sum payment for far less than the amount owed. It actually can work. The catch is that you’re stuck paying fees to the debt settlement company that may be close to—or even exceed—the amount you’ve saved. Plus your credit rating is shattered. In the worst case scenario, you might pay thousands to the debt relief company and still fail to reduce your debt in the slightest. These companies’ actions are “appalling beyond words,” said Senator John D. Rockefeller (D-WV), who ordered the GAO investigation. “These debt settlement companies are kicking people when they are down.”
There is a legitimate alternative to all this. It’s called “debt consolidation.” Such programs are usually managed by nonprofits following strict ethical guidelines that help you group your debts together into one payment (often using your home as collateral) so that your interest rates can be lowered.
In part due to the GAO investigation, new federal laws went into effect in October of 2010 that make it more difficult for unscrupulous debt relief firms to continue doing business as usual. But industry insiders warn that the new laws will not protect consumers from all fraud and deception. If you are in debt and can’t find your way out, consider the following tips to help you distinguish good help from bad.
1. Check under the hood. Look for a nonprofit credit counseling agency—not a for-profit “debt settlement” company. The nonprofit should belong to either the National Foundation for Credit Counseling (NFCC) or the Association of Independent Consumer Credit Counseling Agencies (AICCCA) or both.
These organizations set ethical standards that all member agencies must follow.
2. Beware extravagant claims. Legitimate companies aren’t going to cut your debt in half—or anything close.
3. Refuse up-front costs. Charging fees in advance is typical among the firms investigated by the GAO. Some of these companies demanded hundreds or even thousands of dollars on day one. A legitimate nonprofit agency will charge you no more than $50 a month, often less, and only after they’ve worked with you to lower your monthly credit payments by at least that amount, says Gail Cunningham, spokesperson for the NFCC.
4. Do a background check. Ask the Better Business Bureau and your state Attorney General’s Office if complaints have been lodged against any credit counseling enterprise you approach.
Sylvia Mitchell finally landed a fulltime position with the Transportation Security Administration. At the same time, she sought help from a nonprofit agency called InCharge Debt Solutions (a member of both the NFCC and AICCCA). With its help, she was able to consolidate her loans, lower her payments, get control over her budget, and, over two years, reduce her credit-card debt to zero. “I’ve learned my lesson,” Sylvia says. “No more credit. From now on, it’s just cash and carry for me!”