The Federal Trade Commission , the Internal Revenue Service, and state regulators have issued consumer alerts for those seeking assistance from tax-exempt credit counseling organizations. Paying bills is never easy, but job loss, divorce or unexpected medical bills can be devastating to a consumer. Many consumers seek help from non-profit credit counseling organizations in managing their debt or "repairing" damaged credit.
The IRS, FTC, and state agencies urge consumers to be cautious when choosing a credit counseling organization. Many credit counseling organizations provide valuable advice, education, and assistance to those seeking to better manage their debt. But an increasing number of complaints to federal and state agencies indicates that some organizations are engaging in questionable activities.
The fact that there are so many disreputable credit counseling companies out there shouldn't make you avoid them entirely if you could benefit from legitimate help. If you're already behind on your bills, unable to make minimum payments, borrowing from one card to pay another, or otherwise demonstrating signs of extreme financial distress, credit counseling might be preferable to bankruptcy.
Credit counseling is not a good option if you're current on your bills and able to pay more than the minimums. Credit counseling itself won't hurt your credit score, but the reactions of some of your lenders might. In short, you need to tread carefully. Here are some of the things you need to consider before signing up with a credit counselor:
1. Is it accredited? You'll want a counselor affiliated with the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies. You can find affiliated agencies.
2. What do regulators say about it? At a minimum, make two calls: one to your local Better Business Bureau and one to your state attorney general's office. Ask how many complaints have been made about the agency and see if any regulatory actions are pending against them.
3. What does the agency say about its services? Avoid an outfit that says credit counseling will have no negative impact on your credit or one that promises to settle your debts for less than you owe without affecting your credit. Such unrealistic promises are a clear sign that you're not dealing with a legitimate operator.
4. What fees are involved? Legitimate credit counselors have had to raise their fees in recent years, but if you're paying much more than $50 to set up your plan, you're probably paying too much.
5. When and how much will creditors get paid? You know that missing or late payments can devastate your credit score. Make sure the counselor tells you, preferably in writing, how much of each monthly payment you make will go directly to your creditors and when the payments will arrive.
It's possible that after all this investigation, you'll discover that a credit counselor's debt management plan won't work. If your credit counselor crunches the numbers and discovers the agency can't help you pay off your bills within five years, you'll probably be told to "explore other legal options." That's code for: Talk to a bankruptcy attorney.
You might want to do that anyway, just to get more information about your options before you decide on a plan. Such a consultation is particularly important if your debts are overwhelming and you have equity in a home. States treat this equity differently, with some protecting all or most of it in bankruptcy court and others figuring it's up for grabs. If you can't protect your equity, it might be worth getting a home equity loan to pay off your debts, assuming you have enough equity available.
For more information - The IRS, FTC, and NASCO regulators recommend that consumers considering using the services of credit counseling organizations check the following Web sites for useful information:
* www.ftc.gov - Become familiar with the latest scam alerts;
* www.irs.gov/charities - Determine whether the organization is tax-exempt and what an organization must do to maintain that status;
* www.nasconet.org - Obtain a list of state charity official offices;
* www.treas.gov/financialeducation - To find more information on federal financial education programs and resources.
If consumers believe that they have been victims of credit improvement fraud, they should immediately file a complaint with the FTC by calling toll free: 1-877-FTC-HELP, or online at www.ftc.gov.
