Debt consolidators to watch out for
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Tess Vigeland:You just love plastic, don’t you?
The Fed says consumer debt rose in July, again. If you’ve ever been in serious credit card trouble — and you can count me in that crowd — you’re intimately familiar with the guilt and shame and horror that goes along with it.
When you decide you need help, the Internet might seem like a natural place to turn. Just type “debt solutions” or “debt consolidation” into a search engine. Scores of websites pop up offering to lift this weight off your shoulders.
But watch your wallet, ’cause sometimes, that’s not all they lift. Ashley Milne-Tyte reports on what you should and shouldn’t do if you’re looking for some help to pay off your debt.
Ashley Milne-Tyte: Former schoolteacher Dorothea DeTrinis had more than $100,000 in debt. So last year, she went online for help.
She found a professional-looking website that seemed to offer the assistance she craved. The site even had a link to a TV news story featuring the company. So she figured it had be legit. And she says the guy on the phone seemed so nice.
Dorothea DeTrinis: “We’re gonna help you. No problem. It’s all gonna work out.”
She signed up with a debt settlement plan. That involved laying money away for each of her creditors until she’d collected 40 percent of what she owed.
When that was done, the company said it would pay her creditors on her behalf. All this for a steep monthly fee.
DeTrinis: What really concerned me was that . . . I depended on this debt settlement company to represent me. I was paying them $513 a month just for fees. None of that money was going towards paying off these, uh, creditors.
Consumer watchdogs say a whopping fee is a warning sign that the company is more interested in improving their finances than yours.
Ron Berry is with the Council of Better Business Bureaus. His organization received 170,000 queries and complaints about debt-solution firms last year.
He says it may be tempting for debtors to throw themselves at the first helpful-sounding company they find. But he warns people not to fall for a sales pitch in the form of a slick website or a personable phone rep. He says consumers should do plenty of old-fashioned research before signing up.
Ron Berry: They really need to compare several agencies. It’s a good idea, for example, to try to seek a local agency, somebody that you can do business with in person rather than by telephone. And also compare it with the others as to their fees.
But desperation can lead to rash choices.
Sonia is a single mother with an autistic child who wanted to consolidate her debt. She called a referral service that has an “F” rating from the Better Business Bureau. The service referred her to a company that demanded two up-front payments of $670.
Then, Sonia gave them permission to take 315 bucks from her checking account each month to put in escrow, until there was enough to pay back her creditors. Red flags started to pop up pretty fast.
Sonia: Oh, I would get the runaround. They didn’t even know my account number. Then they refused to give me receipts to show proof that there is an escrow account and that I am making my monthly payments. They said that my bank statement was my receipt.
Then they stopped answering her calls. But, she says, they didn’t stop withdrawing her money. Sonia ended up declaring bankruptcy.
Ron Berry says this is why it’s so important to do your homework first. He says you can go to the Better Business Bureau website and enter the name of the company you’re considering.
Berry: You will see a report pop up for that company. That will tell you where they are, it will also tell you if they’ve had complaints.
And whether those complaints have been resolved. He also recommends checking with these accrediting organizations: The National Foundation for Credit Counseling, and the Association of Independent Consumer Credit Counseling Agencies.
You’ll notice both have the words “credit counseling” in their titles. There’s a reason for that, says Janet Bodnar of Kiplinger’s Magazine. You want a company that will teach you better spending habits.
Janet Bodnar: One of the things — it’s very critical — that you want them to do for you is not just steer you into a debt consolidation plan because that’s where they’re gonna make their money. What you wanna know first is what are they gonna do as far as putting you on a budget.
Later, she says, if you choose to go on a debt repayment plan, it should cost around $25 per month — not hundreds. A company that does not educate clients about how to manage their money isn’t just a potential rip-off, she says, it’s damaging to your long-term financial health.
Bodnar: I mean, if you pay off all your debt and then you go home and you start the same bad spending, or saving or payment habits that you’ve had in the past, you’re gonna be right back into trouble.
But after taking credit classes, she says, you should emerge from debt a new type of consumer.
In New York, I’m Ashley Milne-Tyte for Marketplace Money.
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