$ MoneySmart / Personal Finance
Beware debt management firms promising an easy fix for big debts
Even with a full-time job, Carmen Garcia had piled up a modest mountain of credit card debt.
Her Target store card was brimming every month. Her American Express plastic was loaded up with $8,000 in charges, mostly for gas, groceries and household expenses. She bought a new Kirby vacuum from a door-to-door salesman — and charged it.
By last spring, the tally had swelled to an uncomfortable $18,000.
Although the 55-year-old Sacramento, Calif., resident says she was paying a little over the minimum payment each month, it was like chipping away with a teaspoon. Worried she’d never dig her way out of debt, Garcia turned to one of the hundreds of “debt settlement” companies that promise, for a fee, to eliminate consumers’ unpaid bills by negotiating with their creditors.
In ads that blaze across TV screens, radio airwaves and computer screens, they promise results like “getting out of debt easy . . . while saving you thousands!”
In Garcia’s case, that’s not exactly how it turned out.
After making $250-a-month payments since June to a San Diego-area company, Garcia says she’s financially worse off than when she started. Not only have her credit card bills not been whittled down but, by following the company’s advice to stop making payments, she says she’s now getting calls from creditors.
“I’m scared. I now owe them even more money because of late fees and interest,” said the state employee, who asked that her real name not be used.
She’s one of thousands of consumers nationwide each year who sign up with so-called “debt settlement,” “debt relief” or “debt negotiation” companies. By whatever name, they can be risky.
And — in an economy hobbled by layoffs, foreclosures and a credit crunch — they’re attracting more interest from overloaded consumers.
Stephen Cox, spokesman for the national Better Business Bureau, said there’s been a recent “spike” in inquiries from U. S. consumers asking about debt negotiation companies.
Based on nearly 100,000 inquiries last year alone, he said, “our complaints will be up in 2008.”
Gayle Weller, consumer protection analyst with the California Attorney General’s Office, said her office has seen a similar surge in calls. Some debt companies, she said, “play on people’s ignorance and their desperation.”
There are plenty of reputable companies out there to provide debt counseling and money management. To find the right one requires some homework.
If you’re trying to get your debts reduced, try the do-it-yourself approach first, say Weller and other consumer advocates. Call your creditors directly and ask about better repayment terms and lower interest rates.
If that’s not successful, look for a company that provides credit counseling.
“If you need help managing your money, there are reputable credit counseling organizations that can advise you, help you develop a budget, and offer free educational materials and workshops. They can sit down with you and discuss your entire financial situation ... to solve your money problems,” said Federal Trade Commission spokesman Frank Dorman.
Also be careful about jumping too quickly into a “debt management plan,” or DMP, where you pay a monthly fee to a company that pays down your debts, based on lowered rates it negotiates with your creditors.
Even if your credit card debts get paid off at reduced rates, those charge-offs can cause long-term damage to your credit rating. As the BBB’s Goggin put it: “Your bad debts will drop your credit score like a ton of bricks.”
