It seems like there's a debt consolidation company on every corner, and several factors have contributed to the increase in them.
Increased consumer debt and sub-prime lending make consumers highly vulnerable to credit problems. Banks and other lenders have cut their funding for credit counseling and have become less likely to work with customers who are having debt problems.
"The only point in making money is,
you can tell some big shot where to go."
- Humphrey Bogart |
Probably the most significant factor in creating a market for debt consolidation is the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which limits access to bankruptcy and requires credit counseling for anyone who is considering it.
Unfortunately, not every debt consolidation company is honest, ethical or helpful.
Many so-called "debt relief" organizations prey on people who are uninformed, in financial trouble and vulnerable to the promise of an easy way out.
This has been highlighted by the FTC's (Federal Trade Commission) lawsuit against AmeriDebt. The FTC alleges that AmeriDebt engaged in illegal and unethical business practices that have harmed consumers.
A debt consolidation company offers you a debt management plan instead of giving you a consolidation loan to pay off your other creditors. They make arrangements with your creditors to accept partial payments, write off a portion of your debt or reduce or eliminate interest charges.
The consolidation company "supposedly" collects money from you each month, and then disburses it to your creditors.
The Consumer Federation of America (CFA) has identified four unethical practices that are prevalent in the debt consolidation industry:
- Deceptive and misleading practices. The most frequent consumer complaints about these companies are that they don't fully disclose their fees to the consumer and they deceptively claim that fees are "voluntary," when they are not.
- Excessively high costs. Consumers also complain that these companies charge too much. They charge an excessively high monthly fee, and some charge a high initial fee to establish a debt management plan. AmeriDebt, in particular, has been accused of keeping the entire first payment as a "voluntary" payment to set up the account.
- Abuse of non-profit status. Nearly every debt consolidation company has non-profit status, which makes them exempt from paying income tax. Many, however, operate like for-profit businesses and generate huge salaries and bonuses for their executives and stockholders.
- Not offering other options. Debt consolidation companies have a stake in selling you on a debt management plan. That's how they generate profits. Your debt counselor may even get a commission for signing you up for debt management, which means he or she will push that solution for taking care of your debt and may not even offer other options.
The CFA suggests the "twenty minute test" - if a counselor offers you a debt management plan in the first twenty minutes of an interview, you're probably being scammed. It takes longer than 20 minutes to assess your financial situation and make appropriate recommendations.
Instead, seek our a trusted advisor - perhaps a CPA, or local church leader to steer you in the right direction.
"Who recalls when folks got along without something
if it cost too much?”
- Kin Hubbard |
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Debt is NOT your friend. It's not a wonderful "tool" for building wealth. That's a myth.
