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David Bach The Automatic Millionaire

David Bach, The Automatic Millionaire

Take Precautions When Getting Help with Debt

by David Bach

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Posted on Thursday, February 21, 2008, 12:00AM

Last July, I wrote a column that introduced my DOLP method for paying down debt. (DOLP stands for Dead On Last Payment.)

I receive success stories on a regular basis from readers who have turned their lives around by using the DOLP method. The road to success isn't an easy one. It takes discipline and sacrifice, but with the right tools, coaching, mindset, and commitment to changing your behavior, it can be done.

Buried in Debt

But what if your mountain of debt is so high that it's literally unmanageable? Last week, the New York Times reported that with our slowing economy, a growing number of consumers are finding that they can't even pay the minimum on their credit card bills.

According to the article, the Federal Reserve reported that revolving debt -- an estimated 95 percent from credit cards -- reached a record high of almost $944 billion in December 2007. The amount of debt that's delinquent (where minimum payments are late but the accounts are still open) also appears to be on the rise.

The Federal Reserve also found that 4.34 percent of the credit card portfolios of the 100 largest banks that issue credit cards were delinquent in the third quarter of last year. Charge-offs (accounts closed for non-payment) also grew in that period, and banks expect charge-offs to keep rising in 2008.

Getting Professional Help

If you have massive amounts of debt, you may need professional help. Consider this: Serious debt problems that are out of control will cripple your spirit, break your courage, threaten your marriage, and even ruin your health. For those overwhelmed by credit card debt, there are credit counseling agencies you can turn to for help. Of course, there are scams out there, too, so "buyer beware" applies at all times.

Legitimate credit counseling agencies basically do two things. First, they help you sort out your current problems by negotiating with your creditors to get you lower interest rates and more bearable payment plans. Second, they try to prevent future problems by teaching you financial management skills.

Depending on your situation, a good credit counseling agency should be able to offer you everything from simple advice about handling your money to (worst-case scenario) helping you decide if it's in your best interest to talk to a bankruptcy lawyer. One service virtually all of them offer is something called a "debt management plan," or DMP.

How DMPs Work

DMPs can be lifesavers when your situation is dire -- for instance, if you're completely unable to make your minimum payments or are unable to renegotiate your interest rates. Under a DMP, the agency works out a payment plan with all creditors, often getting late fees waived and interest rates lowered in the process. Once the DMP has been set up, you make one consolidated monthly payment to the agency, which then parcels out the money to all your creditors.

DMPs can be great for the debt-strapped, but they must be used appropriately and run properly. Unfortunately, the new breed of rip-off artist that's infiltrated the credit counseling industry over the last decade rarely does either. To the scammers, DMPs are just another way to separate unwary consumers from their hard-earned money.

Legitimate credit counseling agencies cover their expenses by charging clients small fees to set up and administer DMPs. These fees shouldn't run much more than $50 up front and $25 a month thereafter. Agencies also receive what are called "fair share" payments from your creditors, who pay them a percentage of the money the agency collects from you and passes along to them -- the idea being that if the agency hadn't set up the DMP for you, your creditor might not be getting anything.

Vetting Credit Counseling Agencies

Unfortunately, because DMPs generate revenue, unscrupulous credit counseling agencies try to pressure everyone who comes through their doors into enrolling in one whether it makes sense or not. They also charge unconscionably high fees, pressure clients into making "voluntary" donations, and even deduct money from consumers' payments without letting them know.

Be suspicious of "experts" who claim they can solve all your credit problems with some magical quick fix. Your problems won't be solved overnight. In addition, the National Consumer Law Center and the Consumer Federation of America (CFA) suggest that you look for the following red flags when you're considering signing on with a credit counseling agency:

• High fees: If an agency charges more than $50 up front and $25 a month to set up and maintain a DMP, they're probably ripping you off. An equally bad sign is if they're vague or reluctant to talk about specific fees.

• The hard sell: A counselor who answers your phone call shouldn't be reading from a script. If he or she aggressively pushes the idea of debt "savings" or the possibility of a future consolidation loan, simply hang up.

• Commission-paid employees: The best credit counseling agencies are nonprofit organizations whose only motivation is what's best for you. Employees who earn commissions for signing up clients are likely to care more about their own paychecks than your debt problems.

• The 20-minute test: Whether you do it in person or over the phone, effective credit counseling generally takes a fair amount of time -- often as much as an hour and a half. An agency that offers you a DMP after a consultation of just 20 minutes or less can't possibly know enough about you and your situation to be making an informed recommendation.

• Aggressive ads: Don't be fooled by hard-sell pitches on TV or the Internet that promise to solve all your debt problems. Before signing up with a credit counseling agency, get referrals from friends or family. Also check with the Better Business Bureau to see if the agency has had any complaints lodged against it and, more important, how those complaints were handled.

Trustworthy Referrals

Consumers looking for a counselor to help them solve their debt problems face a real challenge. As the CFA points out, it's virtually impossible to tell the honest, caring agencies from the rip-off artists simply by looking at an ad or making a phone call. So how do you find a good one?

By far the best way is through a referral. As I noted above, if you have any friends or relatives who've used a credit counseling agency, ask them how they fared. Nothing beats personal experience and a recommendation from a satisfied client. In addition, the Federal Trade Commission web site features some great information, including specific questions to ask when choosing a credit counseling organization.

Probably the most highly regarded referral service in the country is Consumer Credit Counseling Services. The CCCS is an offshoot of the National Foundation for Credit Counseling (NFCC), the nation's oldest national nonprofit organization for consumer counseling and education on budgeting, credit, and debt resolution. The NFCC has 113 nonprofit, community-based member agencies and more than 900 local offices throughout the country.

According to Gail Cunningham, senior director of public relations for the NFCC, over 2.2 million consumers were helped last year by member agencies across the country. You can find an affiliate near you by calling (800) 388-2227 toll-free, or by visiting their web site.

Protect Yourself

Though the NFCC is extremely reliable, that doesn't mean you shouldn't do some research of your own. Ms. Cunningham emphasizes the importance of shopping around for the right credit counselor for you: "It's up to the consumers to do their due diligence when choosing whom to work with."

For a complete listing of questions you should ask prospective agencies, see the NFCC's credit counseling page.

Finally, if you've been victimized by a fraudulent or unethical credit counseling agency, file a complaint with the Federal Trade Commission by calling (877) 382-4357 toll-free, or by going to the FTC's web site. Then contact your local state Attorney General's office.

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27 Comments

Showing comments 6-27 of 27<< Previous
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  • Michael - Friday, February 29, 2008, 2:22PM ET  Report Abuse

    • Overall: 1/5

    I heard from a coworker that if you just don't pay your creditors eventually they will go to collections. A collector will call you and ask you for the money and will be willing to negotiate a lower amount. If you don't pay still then they will pull your trw an screw up your credit history. If you can live with this for 7 years then eventually they give up and your off the hook scott free and your credit history is wiped away after the 7 years have passed and you start all over again :)

  • scotts - Thursday, February 28, 2008, 5:45PM ET  Report Abuse

    • Overall: 3/5

    Something the credit cards companys really don't want you to know: Try this on for size. Negotiate with your creditors by yourself. If your debt beomes delinquent, your interest rates rise and late fees start accumulating. Let them. Save your monthly payment aside and wait. Most delinquincies will be sold at the time of charge off for around 25 cents per dollar owed or less. Charge off occurs once the debt is 270 to 330 days past due. Use what you have saved to negotiate a complete payoff. In addition part of the settlement should include the debt is paid as agreed and paid in full, eliminating any bad marks on your credit.

  • Karl - Wednesday, February 27, 2008, 3:09PM ET  Report Abuse

    • Overall: 1/5

    What about the bankruptcy option? Contrary to what the pundits are saying, consumer bankruptcy is alive and well. Before spending $1,000.00 to $3,000.00 in fees for a DMP that will most likely fail while still ruining your credit score, you should talk to a bankruptcy attorney about ALL of your options. Many of these advice columnist have banking backgrounds, which make them naturally adverse to bankruptcy and so they refuse to even talk about that option. Many simply do not understand the law. PLEASE, before throwing your hopes and your money away on a DMP, talk to a lawyer.

  • Stella - Wednesday, February 27, 2008, 8:13AM ET  Report Abuse

    • Overall: 4/5

    I would like to know what happens to your credit score when you use debt counseling agency. I've heard that it affects it negatively but probably not as severely as not getting your credit card bills paid at all.

  • Yahoo! Finance User - Tuesday, February 26, 2008, 8:27PM ET  Report Abuse

    • Overall: 1/5

    If you get yourself into a situation where you can't afford your minimum credit card payments, then you deserve a Darwin Award.

  • Yahoo! Finance User - Tuesday, February 26, 2008, 5:18PM ET  Report Abuse

    • Overall: 1/5

    More flavor of the month from this joker. During the bubble, he told everyone to buy houses. Now he offers routine advice for how to survive his previous advice. Nothing here new, creative or helpful.

  • Yahoo! Finance User - Tuesday, February 26, 2008, 5:13PM ET  Report Abuse

    • Overall: 1/5

    Credit counseling seems like a good idea but the long term consequences can stop you from being able to make a major purchase for 7 years. Credit counseling companies mark your credit report with the words under credit counseling. This will keep you from getting a car for the next seven years. Most lenders look at it more skeptically then a Bankruptsy. You wont be buying a home soon either. Everyone I have known that has gone thru the program has negative things to say about it. It is something you should do on your own unless you feel the only way to stop yourself is CREDIT JAIL. Thats what one of my friends called it. I am sure that David means well but you have to work in lending and have seen a lot of credit reports personally to know this. Our debt system is broke. It encourages abuse and then punishes it. Large lending corporation do not want you to figure it out. They want you in trouble with credit so they can charge you and everyone else high interest rates. Most credit counseling companies on the internet are scams also. One of the large ones CSA is being sued by a few individual states for millions for not being licensed or a non-profit. CREDIT IS A SCAM FOR THE MOST PART. Pay it off and rarely ever ever use it.

  • alkydrinker - Tuesday, February 26, 2008, 4:42PM ET  Report Abuse

    • Overall: 2/5

    I used to work for a major credit counseling company. I was actually employed by a for-profit company that basically did everything, including all interactions with clients. However, they were associated with several non-profit front companies so we claimed to be non-profit to our clients. I found that setup to be a little shady. But, we were able to get our clients breaks on interest rates and fees with some creditors, but not all creditors. It is mostly the major banks that will give breaks. If you sign up for a credit counseling program, remember it is still your responsibility to monitor all your monthly statements even though you are making your payments through a credit counseling group. You have to make sure you are actually getting lower interest and eliminated fees reflected on your statements. Do not assume everything is being taken care of. Joining debt management IS negative on your credit report. You will typically be reported as delinquent once you enroll in the program, even if you were up to date upon enrollment. I would not recommend signing up if you are up to date with your creditors unless you are really slammed with high interest rates and snowballing balances. Note that all of your credit cards accounts that are put into a credit counseling program will be closed. With all non-profits, fees are actually voluntary donations that you arent required to pay. When you sign up, be very persistent that you can’t pay any of these voluntary donations.

  • Steve - Tuesday, February 26, 2008, 4:18PM ET  Report Abuse

    • Overall: 4/5

    Good article, with plenty of tips. One comment from my days working at CCCS. The last agency president I worked for saw the creditor as our 'customer' not the debtor. His rationale was that our funding came mostly from the creditors. Anyone going to an agency needs to be aware that with the money coming from creditors, the bias will be in that direction.

  • Yahoo! Finance User - Tuesday, February 26, 2008, 3:27PM ET  Report Abuse

    • Overall: 5/5

    I know that this will sound like Monday quarterback advice, but the first line of offense is to have a good defense: Do not buy anything you cannot afford. A pair of pants, a car or a house. It doesn't matter what it is.

  • Papa - Tuesday, February 26, 2008, 2:25PM ET  Report Abuse

    • Overall: 5/5

    Great advice on getting out of debt. I'd like to see courses added to high school curriculum that would teach young people how to avoid the debt trap!

  • BTG - 1 - Tuesday, February 26, 2008, 2:19PM ET  Report Abuse

    • Overall: 5/5

    While I have been fortunate to never get in any serious debt trouble, it's good to see those who have getting some solid advice. Of course, since most of us could be only an unfortunate event or two away from being in a similar situation you never know when the advice will come in handy on a personal level.

  • Rex c - Tuesday, February 26, 2008, 2:02PM ET  Report Abuse

    • Overall: 3/5

    Just wanted to say it takes time to get in debt so in turn it will take time to get out. There is no quick fix. There are services out there that will consolodate debt and show you how to accellerate paying it off, I know because that is what I do for family's. And it is 100% free. We can do this because we do not advertise therefore passing the savings on to the consumer. I love what I do its about helping family's.

  • Midlantic Plumbing, Heating & Cooling - Tuesday, February 26, 2008, 1:32PM ET  Report Abuse

    • Overall: 3/5

    Pretty decent article and some usefull info for those is dire financial straits.

  • Yahoo! Finance User - Tuesday, February 26, 2008, 1:19PM ET  Report Abuse

    • Overall: 4/5

    Very good advise to people who may be in trouble. Another point I would like to make to consumers...AVOID debt settlement companies. By signing up with these agencies, many people do more damage than good to their credit and don't save a whole lot of money. Here is an example...Let's say you have $20,000 in debt. Most debt settlement companies charge you a fee of 15% of your outstanding obligations ($3000). Let's say you settle everything for 50% ($10,000). Most banks will file a 1099-C with the IRS, so that $10,000 that was forgiven, is considered taxable income. Let's say you are in a 25% tax bracket ($2,500) you will have to pay Uncle Sam next year. This totals $15,500 that you've paid to settle a $20,000 debt. But...Your credit is shot for the next 7 years, causing you to pay higher interest rates if you want to finance anything. One more points, most major banks will not deal with these companies, and some immediately purse legal action once the limited power of attorney and cease & desist order is received. Getting sued can also be expensive. My advise, stick with a non-profit CCCS if you can no longer keep up with your payments.

  • Yahoo! Finance User - Tuesday, February 26, 2008, 1:14PM ET  Report Abuse

    • Overall: 4/5

    Thank you for encouraging readers to file a complaint if they have been victimized. All too often we see innocent people who are too embarassed to admit they've been taken for a ride. Your complaint might save someone else from getting scammed too.

  • Yahoo! Finance User - Tuesday, February 26, 2008, 1:10PM ET  Report Abuse

    • Overall: 5/5

    I give the article 5 stars but I give NFCC 5 stars too. A year ago I was desperately in debt and turned to them for help. I worked with a counselor who was able to show me how to do this on my own. No debt mgmt plan, no settlements, no bankruptcy needed. And for me the service itself was close to free. Today I'm not debt free completely but headed in the right direction. The morale of my story is to not give up. Seek out help.

  • Wayne - Tuesday, February 26, 2008, 12:40PM ET  Report Abuse

    • Overall: 2/5

    The author omits another viable option for unmanageable debt-- settlement. Like credit counselling, the field is rife with new, unproven companies and scam artists but a visit to the Better Business Bureau website (www.BBBonline.org) should dispel those. Unlike credit counselling, settlement does not involve a thrid-party assistance notation on your credit report, a tag that is as perjorative as bankruptcy to lenders. And often one pays a fraction of the balance. Mr. Bach's knowlege is fine as far as it goes, but he needs to dig deeper if he's going to advise people on their financial future. Might try Google...

  • Brian - Tuesday, February 26, 2008, 11:31AM ET  Report Abuse

    • Overall: 5/5

    People would much rather get a bailout, handout, have their debt forgiven or just walk away rather than sit down with somebody like CCCS and try and work out a plan to repay what they agreed to pay when taking the loan. All we hear is that banks are committing acts of racial profiling and not investing the the socially and economically deprived communities. Well if they the people who claim to be disinfranchised owned up to their obligations and paid their bills on time just maybe they would get better treatment from the banks and lending institutions. No one wants to lend to someone who has no intention of repaying them. It is not racism or profiling it is capital preservation when a bank decides to not lend to a certain group of people based on past actions or inaction whatever the case may be. All they care about is getting shiny rims for their Escalades and Gold Jewerly around their necks and in their teeth get the HDTV's the plasma TV's, new furniture every few months but when it comes time to pay their bills they have no money for that... BULL $HIT

  • Yahoo! Finance User - Tuesday, February 26, 2008, 11:07AM ET  Report Abuse

    • Overall: 5/5

    I helped a friend set up a CCCS account about 4 years ago, and there were a couple of "minor misunderstandings", but they DID get the late penalties waived so it didn't cause any damage. I question the "do it yourself is the best advice" because "yourself" is not likely to get the amount of interest-rate reduction that CCCS did. With several cards, all at "penalty rates", a change of just a few points on several $5000 balances makes a BIG difference in outcome. I highly recommend CCCS, but also recommend going on-line and paying close attention the first 2 to 3 to 4 months to assure proper launch of the plan.

  • Yahoo! Finance User - Tuesday, February 26, 2008, 8:24AM ET  Report Abuse

    • Overall: 2/5

    I've heard negative things about CCCS as well. I think in one case, they were late in paying the debtor's bills. There are so many scammers, the best advice is to do it yourself. It's not that difficult. Get your credit report or take a month worth of bills and come up with a plan. This will involve cutting back on spending but that's the only way to make a significant dent in your debt in a short period of time. Taking 20 years to pay off debt because you want to live the good life today is counterproductive. Just take a few years and get it done. You might even get rid of old bad financial habits and replace them with new better financial habits.

  • Yahoo! Finance User - Tuesday, February 26, 2008, 5:52AM ET  Report Abuse

    • Overall: 5/5

    much needed advice.

Showing comments 6-27 of 27<< Previous

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