Debt counseling - things to look out for

Credit card debt is swallowing you alive.

Despite your best efforts, you seem to keep falling further and further behind. You're now getting hit with late fees and over-the-limit fees. Your balances seem to be going UP not down. You're at your wits end. You need help.

Each day, we're bombarded with commercials and advertisements from companies offering to help you manage your debt. Many are "non-profit" companies (if they're not interested in making money, why do they keep advertising? And where are they getting the money to pay for the commercials?). Some companies promise to repair your credit, or to negotiate a reduction in interest rates or to get your outstanding balance cut in half. Beware!

Warning signs of a bad debt counselling company

Not all debt counseling companies are bad. Those that have been around for a long time truly are non-profit, and want to help you with your debt problems. However, as with everything, there are unscrupulous individuals who are more interested in separating you from your money than they are in providing you with sound (and legal) financial advice and help.

Debtsynergy.com has a list of warning signs. Here are a few of them.

Require payment by money order or cashiers check
Require account numbers before providing you with a quote
Refuse to send you a client agreement by mail
Advise you to include the IRS (IRS debt must be handled separately)
Refuse to quote firm interest rates and payback periods
Advertise cutting your minimum payments in half
Offer to negotiate a reduction in your outstanding balance

The list can be seen at the Debtsynergy website.

The unscrupulous companies try to get you to include the low interest debts that you already have in order to show you a "blended" lower rate. The rates of the high interest debts haven't changed, but they can make it look like they've done something by quoting a "blended" rate.

They suggest that they can get the minimum monthly payment cut in half (down to 1% of the outstanding balance). However, this is no longer possible. The last two banks offering this low minimum payment plan stopped doing it in 2003/2004.

They suggest that they can negotiate a reduction of your outstanding balance. It's true that some creditors will write off part of the balance; this is not a good thing. First, it'll show up in your credit report for 7 years, and second, the amount of the write down will show up as income for tax purposes. You'll end up paying income taxes on the amount of the write down! One expert even goes so far as to show that you'd be better off defaulting on your debts than to use a service to negotiate a write down of your outstanding balance!

What you can do to get lower interest rates

Legitimate companies can negotiate with your creditors to get lower interest rates, in order to reduce the amount that you have to pay each month. But you can do this yourself for free! Why pay someone hundreds of dollars to do something that you can do for yourself?

If you feel, somehow, that you can't possibly negotiate with your creditors, then a credit counseling service will do it for you. Be aware that you'll be charged fees ($30 or more) per account every month! Is your self-doubt worth paying hundreds of dollars a year? Given the number of bad counseling companies out there, it's hard to justify the costs and the risk. If, despite this information, you must avail yourself of the services of a credit counseling service, be very careful in choosing the company you will deal with. Do research on the companies you're considering. Make sure that they're members of the National Foundation for Credit Counseling. Remember, a bad choice can lead to a mountain of problems in the future.