For People on Debt Management Plans: A
Must-Do List
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.
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