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23 Jun 2013

FTC Offers Information about Consumer Debt Relief

If you are struggling with consumer debt such as credit cards, auto loans and student loans, it is important to be very cynical about quick debt relief strategies. Many consumers will simply "Google" a debt solution and click on the first ad that looks credible, but what they may not realize is how many companies are really out to cash in on their misfortune. But where can a person find the right credit counseling service or debt settlement without risking personal bankruptcy? It turns out that the Federal Trade Commission (FTC) offers a wealth of advice on their web site.


Depending on the type of service you need, several solutions are outlined on "Coping with Debt" page of the FTC's web site. (http://www.consumer.ftc.gov/articles/0150-coping-debt#debt) But before you sign an agreement with a debt relieve service, it is still important to check with your local consumer protection agency or your state Attorney General. These organizations can tell you about any consumer complaints on file and let you know if the company has the required licenses to work in your state.

If you think you need help to stabilize your finances, take the time to do some homework and ask questions. Find out what the business provides and how much it costs, and don't rely on verbal promises. A good credit counselor should be upfront about potential issues that might arise with your credit score and how long it might take to get the promised results. Be sure to get everything in writing and read your contracts carefully before signing.

What to expect from credit counseling

A reputable credit counseling service can help you manage your debts, develop a workable budget and offer workshops or educational materials. Counselors are trained in consumer credit, debt management and budgeting. Their certification allows them to develop a personalized plan to solve your financial issues. Typically, the first session lasts about an hour, but several sessions might be required to put a plan into place.

The majority of counseling services are set up as non-profit organizations that offer services through local offices but some offer online and phone counseling as well. The best case scenario is always to meet with a counselor face to face. Look for a credit counselor at larger universities, credit unions and military bases, or ask for a recommendation from your financial institution or local consumer protection agency.

A note of caution on non-profit organizations: Having non-profit status doesn't guarantee their services are free, or even legitimate. Some credit counselors charge high fees which may be hidden or they ask for voluntary contributions from clients. Steer clear of these services.

What is a debt management plan?

Rather than helping you pay the bills yourself, a DMP will require you to deposit money with their organization and they will pay your unsecured debts. The benefit of this is that creditors may agree to lower interest rates. The only condition is that you must not use or apply for any new credit while still enrolled in the DMP, which could take 48 months to complete.

If your finances are out of control and you lack the income to repay your debts, a counselor might recommend enrolling in a debt management plan (DMP). Unless a certified credit counselor has thoroughly reviewed your case, don't sign up for this type of plan. While it may work to reduce debt quickly, it could have a lasting impact on your credit score.

What is a debt settlement program?

Debt settlement might look similar to a DMP, but they are only offered by for-profit companies. The idea here is the company negotiates a smaller lump sum payment of your debt that is less than what you owe. In order to make that payment, the program requires a specific amount of money is set aside each month in savings and transferred into an escrow account until the payment can be made, but it also requires clients to stop making payments directly to creditors.

While a debt settlement firm might be able to settle your debts, it can take a long time to complete the process. Oftentimes, these programs require deposits into a special savings account for three years or longer before all the debt can be settled. Before signing up for such a program, be sure to review your budget carefully and make sure you can keep the payments up for the full term of the agreement. Also, keep in mind that creditors are by no means obligated to settle your debts, and you could continue to accrue interest on some accounts before they are paid off. Because the program will discourage you from sending payments to creditors, your credit could be severely impacted.

Debt Consolidation

Another way to reduce the cost of credit is through consolidation loans, particularly with a second mortgage or home equity line of credit. These loans may seem attractive but they require your home to become the collateral. This means you could potentially lose your home if the payments are missed or late. In addition to interest on a home equity loan, you will also have to pay points. Each point is equal to one percent of your loan amount. While they may be tax deductible they can still increase the cost of the loan.

Photo Courtesy of Stuart Miles / FreeDigitalPhotos.net

Stephen H. Swift

Managing Attorney
Law Office of Stephen H. Swift, P.C.

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