Debt Assistance: Avoid advice from the TV

If you lay await at night worrying about your credit card debt, here’s a bit of advice: Don’t turn on the TV. Because that’s prime time for all the debt negotiation and settlement companies that advertise they can solve your credit card problems. In reality, some of these companies could make them a lot worse.

There are two types of debt assistance: debt counseling/management, and debt negotiation/settlement. The best advice is to seek out the services of debt counseling/management, as these agencies should be registered as a 501-C-3 non-profit agency. 

A trained and certified counselor at this type of agency can offer you budget and debt-management counseling or classes, and help you develop a personalized plan to help solve your credit issues now and avoid them in the future. In fact, current legislation requires that you receive this type of credit counseling and attend a debtor education course before and after you file for personal bankruptcy. 

Your counselor should be able to assess your eligibility for a debt-management program (DMP). A DMP requires that you deposit money in an account with the credit agency to pay your outstanding credit card bills, student loans, and medical bills according to a payment schedule negotiated between you and your creditors. A DMP generally takes up to four years to complete but your credit score is likely to increase at the end of the plan.

The DMP is basically a disciplined plan designed to help you pay debt that you have accrued, preferably at lower interest rates and devoid of penalties. Payment for this type of service should be nominal, around $50 or less than $25 a month if you set up a DMP.

It’s best to avoid the second type of debt assistance, that of a debt negotiation or settlement agency. The goal of the debt settlement agency (which may also be registered as a 501-C-3 non-profit agency, so don’t make this your only guide) is to negotiate payment for a percentage of your actual debt.

This is bad for many reasons. First of all, it requires that your creditor(s) forgive a percentage of your debt, so you don’t take the responsibility of paying off money you borrowed. That’s like a get-out-of-jail free card when you actually committed the crime.

The financial aspects, however, are bad too. Whatever amount (over $600) is forgiven is reported to the IRS and you have to pay taxes on it as if it was earned income. Your credit report will receive a bad mark indicating that the debt was “paid as settled” instead of “paid in full,” and that’s a “tell” to future creditors with whom you may seek credit. This negative mark stays on your credit report for seven years.

The worse part though, is that you may not get your debt paid and could even end up worse than where you started. While you send monthly payments to the agency to help pay off your debt, they may not make these payments. Instead, they collect the money until one of your credit accounts goes into default, and then use the money to negotiate a lower payoff on that one account. Meanwhile, all your other accounts may continue to report delinquency and accrue exorbitant fees and penalties.

Debt negotiation agencies tend to charge higher fees than debt management agencies. They typically also receive a kickback from creditors in exchange for facilitating payment on delinquent accounts.

All in all, a bad idea. If you do feel the need to seek debt assistance, do so carefully and consider the following examples of poor advice you may receive from an agency that claims it can “fix” your credit situation:

• You are not informed of your rights and what you can do for yourself for free.
• The counselor recommends that you do not contact any of the three major national credit reporting companies directly.
• The service claims it can get rid of most or all the negative credit information in your credit report (even if that information is accurate and current).
• The company suggests that you apply for an Employer Identification Number to use instead of your Social Security number in order to reinvent a “new” credit identity and subsequent credit report. By the way, applying for an EIN under false pretenses is a federal crime.

Should you engage one of these services, be mindful never to pay for credit repair services before they are provided, even if you are pressured to do so. Under the Credit Repair Organizations Act, credit repair companies cannot require you to pay until they have completed the services they have promised. 

If you are considering the services and advice of a professional debt counselor, bear in mind that no one can legally remove accurate and timely negative information from a credit report. This includes the credit repair agencies you see on late-night TV. You (or a company you pay) can dispute a charge on your credit report, but if the charge is legitimate it will appear again on the report after 45 days. 

Many companies simply take your money and show you that the claim is removed from the report. Don’t be surprised when it shows back up a couple of months after you paid to “have it removed.”

For more information about credit repair agencies, check out these resources:

Great video from the FTC: 

BankRate.com:

Credit Card Calculator
 

FTC Advice:

Credit Repair: Overview

Credit Repair: How to Help Yourself

FDIC Advice:

Credit Repair

Kara Stefan is a freelance financial writer and author of Head of Household: Money Management for Single Parents. You can find her at Linkedin or Kara Stefan Communications.