Cheryl Parson, president of the Better Business Bureau serving West Central Ohio, published in the Liam News recently about the importance of how consumers must take precaution when choosing debt relief companies to help with their debts mainly, credit card debts. Her comments mirror some of the points I have made in a previous post.
The article started off by saying that the United States economy runs on credit and that credit is often easy to get. As a result, the amount owed can sneak up on the borrower. According to the financial website, NerdWallet.com, 23 percent of those with credit card debt said they had been surprised, at least some of the time, by the amount they owe on their bill. Cheryl pointed out that the average U.S. household with debt has nearly $16,000 in credit card debt and $131,000 of total debt. And, according to Money magazine, the average household debt has jumped 15 percent faster than income over the past twelve years.
When consumers get in over their heads or income situations change, she argues, the pressure to repay debt can be overwhelming, both emotionally and financially, forcing people desperate to get out of their circumstances often turn to debt relief companies to solve their problems. Unfortunately for some people, employing those companies not only doesn’t solve the problems but make them worse because of the high costs involved. Consumers need to be very careful when choosing a debt relief company and what type of plan it recommends.
Debt Relief Plans
The article discusses two types of debt relief options, Dept Management Plans, and Debt Settlement.
Debt Management Plan
A Debt Management Plan is one in which a counselor develops a specific plan for the consumer to pay off debt. Often creditors will reduce interest rates or waive some fees as a part of the plan. Instead of making payments to creditors directly, consumers should send the payment to the debt management company, which in turn uses the money to pay bills under the plan.
If the decision is to use a Dept Management Plan you should:
- Use a reputable, accredited nonprofit credit counseling agency. It should belong to the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies. The agency should have accreditation from the Council on Accreditation of Services for Families and Children or the International Organization for Standardization.
- Verify that the debt relief company makes the monthly payment.
- Get everything in writing, including the fees.
- Make sure the payments are being made to creditors monthly. Confirm with the creditor that they have approved the plan,
Debt Settlement
Hiring a Debt Settlement company is the riskier of the two options. These companies often require debtors to deposit money into a designated bank account, often for a long time, before they settle debts. They may promise a creditor will agree to a settlement. But since the creditor is under no obligation to do so, there’s no guarantee. There can even be negative tax consequences, depending on the debtor’s financial condition. The IRS could rule savings obtained by the Debt Settlement service as income and therefore taxable.
If the decision is to use a Debt Settlement company, proceed with an abundance of caution and get the following answers:
- The price and terms of their service.
- Check with the Better Business Bureau to see if there are complaints against the company and how the company responded.
- Check to see if there are any lawsuits or government actions against the company.
- How long will the negotiation process take?
- How much of the outstanding debt do you have to save before the company makes an offer to your creditors on your behalf?
- What are the negatives of not making direct payments to creditors?
Also, before signing with a Debt Settlement company, get legal advice. You may be able to hire an attorney for less than the cost to enlist a Debt Settlement company.
The article closes with a piece of advice to debtors to consider negotiating with creditors or debt collectors themselves to come up with a manageable payment plan. Every dollar not paid to someone else is money that could go to creditors.