Buyer Beware: Debt Consolidation Companies

Written by Dana Neal

Using third party companies comes at a risk, and can be fraught with peril.

The term “credit counseling” used to mean debt management help.

These days, however, the term more likely refers to companies that are in the business of debt consolidation or debt settlement. I’ve yet to hear from someone who has benefited from such “services,” and often I hear from those who have been hurt.

The term “credit counseling” used to mean debt management help. These days, however, the term more likely refers to companies that are in the business of debt consolidation or debt settlement. I’ve yet to hear from someone who has benefited from such “services,” and often I hear from those who have been hurt.

I received the following email just as I began writing this chapter:

HELP!

From: blank @ noneya.com
To: support @ bestcredit.com
Subject: HELP!
Date: 06/18/05

My husband and I agreed to “hire” Trinity Debt Management to help us consolidate our debt. We paid them $679/month for two years.

When I had to stop working (I was diagnosed with chronic fatigue syndrome) in February of this year, I had some time to research what was happening. I found that there was a $7,000.00 difference in what Trinity took out of our checking account and what our creditors show was paid.

My husband wants to hire an attorney to go after them since they can’t give us a detailed answer to our questions.

Since I am not working, we are struggling BIG TIME. We don’t want to file for Bankruptcy, but are desperate for help (we have hired “Credit Attorneys” to clean our credit up, but we still need to know how we can get a consolidation loan with payments that won’t kill us. We currently own our home, but only have ~8K in equity built up. My husband is an ordained music/worship pastor and started selling health, life and p & c insurance when I started to have health problems. We have five children, but only one 20 year-old still at home.

Can you direct us? I want to buy your book, but we just don’t have the money right now. Any advice you could give us would be GREATLY appreciated.

Thank you!
Regards,

[Name redacted]

Perhaps I could help this person with the credit repair aspect to a limited extent, but once someone gets into such a situation, he or she will need legal help. It happens all too often. Hundreds companies are out there making a great deal of money on the hardship of others. The FTC is shutting down many of these organizations, even nonprofit companies. The FTC raided the National Consumer Counsel and closed its doors in May 2004, and AmeriDebt is currently under investigation for defrauding consumers. AmeriDebt’s Web site is offline, and it looks as if the company is all but finished. Shady operations like these abound, and they cause legitimate companies to struggle with draconian laws meant to shut the bad ones down.

Non-Profits and So-Called Help

The “nonprofits” are the ones the FTC is currently targeting, since they obtained that status to avoid being bound by the Credit Repair Organizations Act. Such immunity precludes them from having to comply with certain disclosure and other consumer protection requirements. Not only is the FTC going after many nonprofits, but the IRS is also unlikely to grant 501(c)(3) (nonprofit) status to credit repair companies. In fact, it hasn’t granted the status to any credit repair organization since April 2003 and has actually revoked the status of four of them, with more being targeted for revocation. Debra J. Kawecki, an IRS attorney, told the Association of Independent Consumer Credit Counseling Agencies in July 2005 that the nonprofits are being shut down for deceptive and fraudulent practices, including high fees, high pressure tactics, and inadequate educational services.² Unfortunately, this hurts legitimate companies as well as consumers.

I’ve tested some of the nonprofits to see for myself what they’re hawking. On June 3, 2004, I contacted 1800creditcarddebt.com (aka 800creditcarddebt.com) as directed by a link on the AmeriDebt Web site, which says: “Unfortunately, AmeriDebt is no longer accepting new clients. However, if you are looking to get help with your debt, you may want to consider 800CreditCardDebt.com.”

The customer service rep I spoke with informed me that the company had two programs to choose from—debt consolidation and debt settlement. He explained that debt consolidation would roll all my debts into one and reduce my interest rate, not to exceed 9 percent, while debt settlement would permit the company to negotiate with creditors on my behalf, and I would end up paying 75 cents on the dollar. He said that the company would pay creditors whatever it could negotiate and then keep the rest of the money. (In other words, if the company negotiates 65 cents on the dollar, it keeps the 10 cents.) He said, “The debt settlement will hurt your credit, but don’t worry, because we’re going to set you up with a credit repair program afterward, and they’ll get all of that removed.” When I asked more about the credit repair program and how much it costs, he told me it’s out-sourced to a law firm. When I asked which law firm, he refused to answer and then was evasive, giving me a bunch of double talk.

But there was a lot of bunk in the whole conversation, especially when I asked him to provide a copy of the contract and he refused, saying that I had to fill out several forms and agree to go into the program before a contract would be provided. Then he actually claimed he didn’t have a copy of the contract! After a great deal of smooth talking, he realized that I wouldn’t join without seeing the contract, so he relented. The contract indicated the company’s true name: Debt Set, Inc. I get e-mails all the time from people who claim they’ve been hurt by this company.

As I’ve said, the “nonprofits” are often the worst—contrary to what some may tell you. But I’ve yet to discover one debt consolidation/credit counseling organization that’s on the level, nonprofit or otherwise. I can’t recommend them for any reason. Creditors often have their own credit counseling and debt repayment plans. Accounts are often reported to the bureaus as such and will likely cause you to be denied.

Recently a young lady who was attending a local college told me that her finance teacher was advising students who were in financial trouble to seek out nonprofit debt consolidation organizations. Unfortunately, this teacher is seriously misinformed, and it’s a shame that impressionable minds will soak up such dubious advice.