NEW YORK, Feb. 7 2008
Spotting Credit Repair, Counseling Scams
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Play CBS Video Video Get Credit Help Without Scams Credit card debt in the U.S. has increased to the highest level since the 2001 recession. Ray Martin talks with Russ Mitchell about how to get professional help with debt and avoid the scams.
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The second service they can provide is a Debt Management Plan, or DMP. Essentially, what they do is arrange for you to make one payment to them and then they take over the administration of splitting up your single payment and doling it out to your various unsecured debts in accordance with terms that have been agreed to by your creditors.
Of course, for this they keep some of your money every month as a fee for their DMP services.
If you sign up for a DMP, you authorize the credit counseling service to intervene with creditors on your behalf. You send the credit counseling company a check every month, and they parcel that out to pay off your debts for you.
When using a DMP, the credit counseling firm uses its prearranged deals with various creditors, in which they have negotiated some or all of the following terms in regards to the debt you owe:
1) Lower your credit card interest rates
2) Eliminate late fees or other fees that have accumulated on your account
3) "Re-age" your credit accounts by re-categorizing them as “current” instead of being “late”.
Some studies suggest that more people should turn to these services before their debt becomes an unmanageable problem. Even after debt becomes a problem, this education and debt management can be helpful to people struggling with their debt.
In fact, the US Bankruptcy Code now requires all individuals who file for bankruptcy relief to receive a briefing within 180 days before filing that outlines credit counseling and provides assistance in performing a budget analysis. These services must be provided by a nonprofit budget and credit counseling agency this is approved by the United States Trustee Program, a part of the Dept of Justice. For a list of approved credit counseling agencies, log on to www.ust.cc.help@usdoj.gov.
Costly, Problematic DMPs
There are some consumer reports that some credit counseling firms are not offering debt management advice and instead are pushing consumers into their main product -- DMPs.
If you are in serious debt trouble, a DMP sounds like a good thing, right? Not if they don’t deliver what they promise. Consider the following message received from a consumer who complained about her experience with a DMP:
"I got into debt early and tried to fix my payment problems with credit counseling. The hope was that they would lower my interest rate and I would have only one payment to make. The only thing they did was lower my credit score and add more late fees. The counseling service wouldn't pay on my due date because they only paid once a month on their payment schedule…now I have more debt."
Better Business Bureau reports suggest that complaints against credit counseling agencies are on the rise. A Consumer Federation of America study found problems exactly like the one explained above. Some of the biggest problems include such behavior as not disclosing fees to customers, not paying debt accounts on time, and signing up customers for DMPs without their approval.
In a recent BBB Consumer Alert in Michigan, consumers allege that a company named “Clear Your Debt LLC” tells folks they are merely filling out applications for the company to review whether the individual is a qualified candidate for its services, then makes debits of its fees from their checking accounts without their consent or knowledge.
A Pass/Fail Test
If the credit counseling service you are considering looking into flunks any of the following tests, you should avoid it. These are the top three "red flags" that the firm could do more harm than good:
1) Flunk the 30-Minute Test: Before offering you any advice, the credit counselor should spend at least 30 minutes talking to you about your finances. A truly effective counseling session should last between 30 and 90 minutes. If, after less than 30 minutes, they are “advising” you to enroll in their debt management plan, go elsewhere.
2) Push you into a DMP: Not everyone who visits a counseling service needs to be enrolled in a DMP. The debt counselor should talk to you about whether a debt management plan is appropriate for you, rather than assume it is appropriate. The truth is these companies make money when you enroll in a DMP. Many creditors give them a percentage of what you pay toward your debt. If a credit counseling company is pushing you into a DMP, you can assume it cares more about its own bottom line than yours.
3) Charge High Fees: Most services charge a set-up fee to begin a DMP and a monthly fee to administer the program. However, if a firm charges more than $75 as a set-up fee, and monthly administration fees that exceed $40, go elsewhere.
What You Need to Know
So here's the big question: Is it worthwhile for anyone to use a credit counseling service?
If you are having a problem managing your debt payments, specifically credit card debt payments, and this is causing you to be late or miss payments, incurring high interest and additional fees on multiple accounts, then you should think about calling several credit counseling companies and seriously considering their services.
Before you decide to work with a credit counseling service, do the following:
If you decide to turn to one of these companies for help, you have to stay involved in your financial affairs.
Before you enroll into a Debt Management Program, you need to call your creditors and make sure that they have agreed to the terms of your DMP; you have to make sure your bills are being paid on time.
If you enroll in a DMP, you need to know how this will show up on your credit report and how it can affect your credit score. Next to each credit account enrolled in a Credit Counseling Debt Management Program, there will be a comment that states "MANAGED BY CREDIT COUNSELING COMPANY" or something similar.
It is important to know this because, if you later apply for another loan -- such as a car loan or mortgage -- the lender will see this and may ask how you got into the situation and what you are doing differently now to avoid it in the future. And while using a credit counseling service does not directly affect your credit score, having your debt accounts enrolled in a DMP may lower it for awhile.
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Pursuant to the Fair credit reporting act all information listed in a consumer credit report must be accurate, timely and verifiable.
Here is the law http://bcrconsulting.us/html/LAW/title15_consumer_credit_protection/fair-credit-reporting-act.html
Under the statute the word verifiable means that the furnisher must have documents to prove the accuracy of all information reported, if they don't have those docs they cannot report if the consumer disputes the information, if it cannot be verified it doesn't matter if it is accurate and timely, the word of a bank or collection agency is not enough to keep the derogatory information in a consumer report.
The congress included this in the law in order to prevent furnisher to report whatever they want, in 2003 the FACTA amendment gave consumers the right to dispute directly with the furnishers and created a private right of action for consumers to sue on intentional or negligent violations
This is the reason why credit repair works, 90% of collection agencies reporting to the bureaus don't have much more besides a few pieces of ID info , amount they want to collect and account number, when a consumer ask them to verify under the FCRA they have to delete. Also banks use to purge old delinquent records from their system, if they do and the consumer disputes they may not verify so the account gets deleted.
Of course the credit bureaus, collection and banking lobbies are working very hard to hide this fact from the public, they want everybody to believe that there is no way to remove timely and accurate information, conveniently forgetting about the verification requirements.