Beware companies pushing debt-settlement trap

SAN FRANCISCO (05/18/09)--As millions of hardworking Americans--many of them unemployed--struggle to pay debts, they're increasingly being targeted by debt-settlement companies offering nothing more than false hope and steep fees, triggering investigations of some operations (MarketWatch May 7).

In response to consumer complaints, New York Attorney General Andrew Cuomo has launched a nationwide investigation of 14 debt-settlement companies. The companies are under scrutiny for allegedly charging hefty up-front fees but failing to deliver on promises of debt relief.

Complaints include company representatives telling clients to stop making payments and start saving for a negotiated settlement. Few clients, however, are able to complete the program because they lack sufficient financial resources; they're left in an even worse spot than when they began. While saving for the anticipated settlement, they face creditors who are demanding payment, charging late fees, and imposing penalties. With no contact from the debt settlement company, creditors often ding victims' credit reports and scores, putting their long-term financial security at even greater risk.

Before you get snagged in a trap, know your rights and responsibilities:

Contact creditors directly. You can negotiate credit debt by avoiding the middleman and personally contacting the issuer. Debt-settlement companies won't receive any more favorable debt negotiations than individuals who call directly (Consumer Reports April 14).

Seek a certified credit counselor. The National Foundation for Credit Counseling employs professional counselors to help you pay down debt. Locate counselors at nfcc.org or debtadvice.org.

Don't pay ahead. The problem with advance payment is that the company has your money independent of the results it delivers. Some debt-settlement companies collect huge up-front fees yet fail to deliver on promised services.

Watch the time frame. If a company tells you the debt-settlement process will take four years or more, just say no--you'll likely be sued by your creditors during that time.

There are legitimate debt-settlement companies that can help, but always check with the Better Business Bureau (bbb.org) to obtain a reliability rating first.

For more information, read "Tough Times Series: Steps Before, During Layoff Make It Easier to Cope" in Home & Family Finance Resource Center.

courtesy of cuna.org