Credit Counseling Pitfalls

Consumers … Proceed with Caution!

If you are considering attempting to resolve your debt problems through a “not for profit” credit counseling service or bill consolidation service I urge you to be cautious. Through the experience of many of my clients and national investigations the Neiman Law Office believes many credit counseling services or debt repayment services promise far more than they can deliver. More and more “credit counseling” services are offering to collect money from consumers and redistributing it to the consumers’ creditors for a fee. This model of credit counseling service is a trend which has been accelerating over the last several years. It may be referred to as a Debt Management Plan. Credit counseling services (CCS) or Debt Management Plans frequently promise to obtain a substantially lower interest rate on various bills for consumers. Some CCSs will suggest they may be able to obtain a zero percent interest rate for some accounts. Some of these promises to obtain a reduction in interest rate charges are legitimate. However, rarely is a CCS able to deliver on promises of reducing all of a consumer’s credit card charges and other bills to a substantially lower interest rate. Many of the CCS suggest they will be able to obtain the forgiveness of a substantial portion of principal balance of consumer debt. Too often, these promises are later shown to be illusory. The consumer must be cautious that working with a CCS will not result in more harm to their credit than good.

“I just wanted to take the time to thank all of you. When I first walked into your office, I was scared, confused and had no idea how to get a handle on my debt. After months of trying to work it out with the credit card companies to no avail, I moved on to the debt consolidation companies who told me I was ineligible and that I should consider bankruptcy. BANKRUPTCY!! That word alone sent shivers down my spine.”
“When I walked into your office my mind was put to rest. Everyone was so friendly and everything was explained in such a straightforward easy to understand way. The process was very smooth because I knew if I had any questions or problems I could pick up the phone and call.”   P.M.

A number of CCS are operated by the credit card companies or funded by the banking industry. They are able to obtain a reduced interest rate with a particular bank or credit card because they are, in a roundabout fashion, related to that bank or credit card company. In other instances they have no relationship or, may in fact be direct competitors of another bank, and will not be able to obtain the reduced interest rate promised.

Another common problem is that while the CCS is promising to coordinate the payment of a consumer’s bills many of these bills are, in truth, going unpaid. This lack of timely payment is often without the consent of the creditor. While the CCS collects the consumer’s money, takes fees for their effort, and “coordinates” the repayment of the bills the consumer is likely to be charged for late payment fees and perhaps face a default on the credit repayment terms. This is likely to result in higher interest rate charges and greater costs to the consumer. Often the consumer will first learn of this unhappy situation when the bill collector calls, looking for payment or a collections lawsuit is filed. This, of course, is quite the opposite of what has been promised by the CCS.

Questions to ask of a Credit Counseling Service:

• If the Credit Counseling Service is proposing to collect money from me for the repayment of my debts, what will my monthly payment be?
• Will it increase?

• Will all of my credit cards, personal loans, medical bills, utility bills, etc. be included in the debt reduction payment plan?
• What happens with any bills that are not included?

• Will the interest rates charged be reduced on my bills?
• Which ones? By how much?
• Are we certain of the reduced interest rate?
• When will we know for sure?

• Is any portion of the debt going to be forgiven (reduced to zero)?
• Which accounts? Are we certain?
• When will we know for sure?

• What will happen with the payments I make here (to the Credit Counseling Service)?
• Are they held until some point in the future?
• How quickly are my credit card accounts paid?
• Will I be charged late fees and interest by creditors while they await payment from the Credit Counseling Service?
• Will my creditors report my debts as “late” or “in default” to the credit bureaus?

• What is reported to the credit bureaus about credit counseling/debt counseling?
• How will the report affect my credit rating?

• If any of my accounts are co-debts (co-obligations with someone else) what will the effect of my debt counseling be on the co-debtor?
• What fees for administration of this Credit Counseling Service will this organization charge me?
• Is it a percentage of each monthly payment?
• Will an amount have to be paid to this organization before you begin disbursing my payments to the credit card accounts and other bills?
• What happens to the status of my accounts in the meantime; late fees, interest charges, reports of default to the credit bureaus, etc.?
• What other funding does this organization receive?
• Do you receive funding from credit card companies, banks? Which ones?

• If you receive funding from credit card companies or banks and have a business arrangement with them (i.e., collect funds from distressed customers for a fee, in return distressed customers receive a reduced interest rate or other beneficial savings) will other banks or credit card companies in competition with this CCS agree to reduced fees and expenses?

• Under this plan, is there any provision for regular monthly savings (for emergencies) in my budget?
• Any allowance for savings for retirement?
• Any allowance for savings for healthcare?
• Any allowance for savings to replace an old car?

• Must I commit all disposable income to payment of debt?
• How do I deal with increases in rent, property taxes and medical insurance premiums?

• Under this plan, how long will it take me to pay off this debt?
• What happens if I miss a payment, or am late?

For More Information and a FREE Confidential Consultation, Please Call
Us at 603-357-3777 or Toll Free in New Hampshire at 1-800-845-0196