Be wary of debt-relief pitches
So you have piled up some bills. And then a letter arrives saying you're among certain people who qualify for an "exclusive debt mediation program" or words to that effect. The correspondence looks like it's from a bank or a credit card company. It offers what appears to be a pretty good deal to get out of debt.
Well, don't fool yourself into thinking you're special.
Read the fine print and hang onto what's left in your wallet. Debt settlement programs are a costly _ and sometimes crooked _ way to go. And you may not be able to reduce as much of your debt as those letters promise.
Every time he turns around, Mark Mandel says, it seems like somebody else is telling him that he's been "approved" for a "Consumer Debt Relief" stimulus program or a "U.S. Homeowner Affordability and Stability Package."
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But each time, he knows something isn't quite right. One letter tells him that he can be debt-free in two years; another offers a before and after chart showing how he can legally reduce his debt and pay an average of only 45 percent of what he owes. The small print notes: Individual results vary.
"I keep hearing my father say 'If it sounds too good to be true, it probably is,' " said Mandel, 57, who is single with no children, works at the Mt. Clemens, Mich., DuPont plant that supplies paint to automakers, and says he is able to pay his bills.
"Of course, my father would be very upset with me for being in debt at all."
Mandel is right to be wary of such offers. Any guarantee that you can cut your $50,000 credit card debt in half and get it paid off in a year or less is too good to be true. And if you really believe these deals are government programs, you're in trouble. No such programs exist.
Actually, a consumer who bites on one of these offers could end up paying $800 to $2,000 in fees for little or no debt relief. Some consumers have complained that they ended up in worse financial shape after working with a debt-settlement company, according to a report issued in April by the Government Accountability Office.
And, like the aggressive brokers who helped get homeowners in trouble with bad mortgage deals, some salespeople have a big incentive to sign up people. The GAO report noted that some companies pay a $200 commission for each client enrolled in a debt-relief program.
But consumers should benefit from new rules now in effect for companies offering debt-relief services, including a ban on upfront fees.
Evan Zullow, attorney for the Federal Trade Commission's Division of Financial Practices in Washington, said the new rules apply to companies marketing through cold calls as well as those advertising an 800 number on TV or the Internet.
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The Federal Trade Commission rules specify that fees for debt-relief services may not be collected until the company has been able to change terms on at least one of the consumer's debts. Even then, if the consumer has more than one debt, the full fee cannot be charged all at once.
"They can't request or receive any fee from you until first they've delivered the result," Zullow said.
Other rules relating to debt-settlement telemarketing took effect in late September and include:
_Requiring debt-relief companies to make specific disclosures. For example, Zullow noted that companies would need to disclose how long it might take for you to build up enough savings before the debt-settlement company could approach your creditors with an offer, how long you'd have to wait to see results of its efforts and what could happen if you stop making payments to creditors, as might be suggested in part of the debt settlement process. Consumers need to understand that their debt could continue to mount as they build that lump sum to use later in a settlement.
_Prohibiting debt-relief companies from misrepresenting their services. Some examples: A company cannot say it is a nonprofit company if it's a for-profit. A company cannot say it won't charge any fees until you complete the program if it there are fees assessed before you pay off all your debt. A company cannot say it would save you 50 percent of what you'd owe if it doesn't factor in the fees involved.
Take someone who enrolls in the program with $10,000 in debt. It's inaccurate, Zullow said, to claim the person will cut his or her debt by 50 percent if he or she paid $5,000 to creditors and $2,000 in fees to the settlement company. That's really paying $7,000 to settle a $10,000 debt, or 70 percent.
Most people who sign up for debt-settlement programs do not complete these programs, based on the industry's data, Zullow said. So any projections should reflect all consumers _ not just those who successfully completed the program.
