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Reputable credit
counseling organizations employ counselors who are
certified and trained in consumer credit, money and
debt management, and budgeting. Those organizations
that are nonprofit have a legal obligation to
provide education and counseling.
But not all credit counseling organizations provide
these services. Some charge high fees, not all of
which are disclosed, or urge you to make “voluntary”
contributions that can cause you to fall deeper into
debt. Many claim that a debt management plan is your
only option before they spend time reviewing your
financial situation, and offer little or no consumer
education and counseling. Others misrepresent their
nonprofit status or fraudulently obtained nonprofit
status by misrepresenting their business practices
to regulators.
The Federal Trade Commission (FTC), the nation’s
consumer protection agency, and some state Attorneys
General have sued several companies that called
themselves credit counseling organizations. The FTC
and the states said these companies deceived
consumers about the cost, nature, and benefits of
the services they offered; some companies even lied
about their nonprofit status. Several of these
companies are now going out of business. Similar
companies also may be shutting their doors, even
though they haven’t been sued by the FTC or the
states. That could be of special concern if you have
a debt management plan with one of these companies.
Must-Dos for Anyone With A DMP
Organizations that advertise credit counseling often
arrange for consumers to pay debts through a debt
management plan (DMP). In a DMP, you deposit money
each month with a credit counseling organization.
The organization uses these deposits to pay your
credit card bills, student loans, medical bills, or
other unsecured debts according to a payment
schedule they’ve worked out with you and your
creditors. Creditors may agree to lower interest
rates or waive certain fees if you are repaying
through a DMP.
The FTC has found that some organizations that offer
DMPs have deceived and defrauded consumers, and
recommends that consumers check their bills to make
sure that the organization fulfills its promises. If
you are paying through a DMP, contact your creditors
and confirm that they have accepted the proposed
plan before you send any payments to the
organization handling your DMP. Once the creditors
have accepted the DMP, it is important to:
-make regular, timely payments.
-always read your monthly statements promptly to
make sure your creditors are getting paid according
to your plan.
-contact the organization responsible for your DMP
if you will be unable to make a scheduled payment,
or if you discover that creditors are not being
paid.
You need to be aware that if payments to your DMP
and creditors are not made on time, you could lose
the progress you’ve made on paying down your debt,
or the benefits of being in a DMP, including lower
interest rates and fee waivers. Although creditors
may have forgiven late payments that you made before
you began the DMP, the creditors may be unwilling or
unable to do so if payments are late after you have
enrolled in a DMP. If you fall behind on your
payments, you may not be able to have your accounts
“re-aged” again (reported as current), even if you
start a new DMP with a new counselor. That means
your credit report will have “late” marks and you
will rack up late fees, which, in turn, will lead to
more debt that could take longer to pay off.
If Your Credit Counselor Has Gone Out of Business
What happens to your DMP if the credit counseling
company that managed your debts shuts down? A
counseling agency that is going out of business may
send you a notice telling you that your DMP is being
transferred to another company. Or it may tell you
that you need to take some action to keep your
financial recovery on track. If a government agency
has filed an action against your credit counseling
company, you may get a notice from a third party. If
you discover that the organization handling your DMP
is going out of business you need to:
-contact your bank to stop payment if you are making
your DMP payments through automatic withdrawal.
-start paying your bills directly to your creditors.
-notify your creditors that the organization
handling your DMP is going out of business. Consider
working out a payment plan with your creditors
yourself. Ask if they will give you a reduction on
your interest rate without a DMP.
-order a copy of your credit report. Check for late
payments — or missed DMP payments — that may result
from the company going out of business. If you see
“late” notations you don’t expect, call the creditor
immediately and ask that the notation be removed.
Understand that they have no obligation to do it.
If payments are late because the organization
handling your DMP has failed to make scheduled
payments, the consequences can be just as
devastating as if you failed to make payments to the
DMP. If you do not act quickly to make arrangements
with your creditors, you could incur late charges
that increase your debt, lose the lower interest
rates associated with the DMP, and have “late” marks
on your credit report.
Important Questions to Ask When Choosing a Credit
Counselor
If the organization you were working with shuts
down, you may be able to work a payment plan on your
own directly with your creditors. But if you decide
that you need additional credit advice and
assistance, or if you are considering working with a
credit counselor for the first time, asking
questions like these can help you find the best
counselor for you.
What services do you offer?
Look for an organization that offers a range of
services, including budget counseling, savings and
debt management classes, and counselors who are
trained and certified in consumer credit, money and
debt management, and budgeting. Counselors should
discuss your entire financial situation with you,
and help you develop a personalized plan to solve
your money problems now and avoid others in the
future. An initial counseling session typically
lasts an hour, with an offer of follow-up sessions.
Avoid organizations that push a debt management plan
as your only option before they spend a significant
amount of time analyzing your financial situation.
DMPs are not for everyone. You should sign up for a
DMP only after a certified credit counselor has
spent time thoroughly reviewing your financial
situation, and has offered you customized advice on
managing your money.
If you were on a DMP with an organization that
closed down, ask any credit counselor that you are
considering what they can do to help you retain the
benefits of your DMP.
-Are you licensed to offer your services in my
state?
Many states require that an organization register or
obtain a license before offering credit counseling,
debt management plans, and similar services. Do not
hire an organization that has not fulfilled the
requirements for your state.
-Do you offer free information?
Avoid organizations that charge for information
about the nature of their services.
-Will I have a formal written agreement or contract
with you?
Don’t commit to participate in a DMP over the
telephone. Get all verbal promises in writing. Read
all documents carefully before you sign them. If you
are told you need to act immediately, consider
finding another organization.
-What are the qualifications of your counselors? Are
they accredited or certified by an outside
organization? If so, which one? If not, how are they
trained?
Try to use an organization whose counselors are
trained by an outside organization that is not
affiliated with creditors.
-Have other consumers been satisfied with the
service that they received?
Once you’ve identified credit counseling
organizations that suit your needs, check them out
with your state Attorney General, local consumer
protection agency, and Better Business Bureau. These
organizations can tell you if consumers have filed
complaints about them. The absence of complaints
doesn’t guarantee legitimacy, but complaints from
other consumers may alert you to problems.
-What are your fees? Are there set-up and/or monthly
fees?
Get a detailed price quote in writing, and
specifically ask whether all the fees are covered in
the quote. If you’re concerned that you cannot
afford to pay your fees, ask if the organization
waives or reduces fees when providing counseling to
consumers in your circumstances. If an organization
won’t help you because you can’t afford to pay, look
elsewhere for help.
-How are your employees paid? Are the employees or
the organization paid more if I sign up for certain
services, pay a fee, or make a contribution to your
organization?
Employees who are counseling you to purchase certain
services may receive a commission if you choose to
sign up for those services. Many credit counseling
organizations receive additional compensation from
creditors if you enroll in a DMP. If the
organization will not disclose what compensation it
receives from creditors, or how employees are
compensated, go elsewhere for help.
-What do you do to keep personal information about
your clients (for example, name, address, phone
number, and financial information) confidential and
secure?
Credit counseling organizations handle your most
sensitive financial information. The organization
should have safeguards in place to protect the
privacy of this information and prevent misuse.
For More Information
The FTC publishes a series of free publications on
credit and financial issues, including Fiscal
Fitness: Choosing a Credit Counselor and Knee Deep
in Debt. They are available at ftc.gov/credit, or by
calling toll-free: 1-877-FTC-HELP. |
