Debt Consolidation Companies: 6 Red Flags

June 16th, 2011, by

Q: How safe are these debt consolidation companies, and how do I choose a reputable one?

A: I am not a fan of debt consolidation companies. So let me be up front. I don’t recommend them to anyone.

Debt consolidation companies promise to help reduce the amount of debt people owe by negotiating with their creditors. And for this help, people are charged several hundred to several thousand dollars (money you could just as well use to pay down your debts).

In return for their fee, some debt settlement companies claim that they can help reduce your debt for anywhere from 30% to 70% of the balance.

As the Federal Trade Commission points out, the companies can’t guarantee they will be able to persuade a credit card company to accept partial payment of a debt you truly owe. Even if they can, you must put aside money for your creditors each month. Meanwhile, it may be months—or even years—before the debt settlement company negotiates with your credit card company to settle your debts. And, if you stop making your payments in the meantime, the credit card company usually adds late fees and interest to the debt each month. That can cause your original debt to double or triple.

There were so many consumers complaining about the debt settlement industry that the FTC issued new rules that went into effect October 2010. Now, for-profit companies that sell debt relief services over the telephone can’t charge a fee before they settle or reduce a customer’s credit card or other unsecured debt. The ban covers telemarketers of for-profit debt relief services, including credit counseling, debt settlement and debt negotiation services.

If you decide to go with a debt consolidation company, the FTC says you should know that the company is not allowed to collect a fee until:
• The debt relief service successfully renegotiates, settles, reduces or otherwise changes the terms of at least one of your debts;
• There is a written settlement agreement, debt management plan or other agreement;
• You have made at least one payment to the creditor as a result of the agreement negotiated by the debt relief provider.

Additionally, here are some red flags to look out for, according to the FTC:
• The company charges any fees before it settles your debts.
• It touts a “new government program” to bail out personal credit card debt.
• It guarantees it can make your unsecured debt go away.
• It tells you to stop communicating with your creditors.
• It tells you it can stop all debt collection calls and lawsuits.
• It guarantees that your unsecured debts can be paid off for just pennies on the dollar.

Rather than a debt settlement company, I recommend instead that you find a nonprofit credit counseling company at the National Foundation for Credit Counseling’s Web site.

Last modified: June 16, 2011 at 11:24 am