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When the economic climate takes a turn for the worse, all kinds of crooks come out of the woodwork trying to take advantage of panic and uncertainty. In our current downturn, the scam takes the form of companies soliciting frazzled debtors with plans that promise to stop the negative impact their debt is having on their lives. With so many people experiencing the negative consequences of bad credit, debtors are eager for good news. But an offer that’s impossibly true is usually, well, impossible.
A number of new credit counseling firms promise to significantly decrease debt, but assess steep charges upfront and throughout the process. Often, these companies will advertise to economically vulnerable individuals with poor credit histories, stuck with high interest rates and lacking the credit history to take advantage of 0% balance transfer deals.
Whether on TV or via email, you’ve probably been solicited by one of these firms offering “not-for-profit debt management.” While it’s true that profit-oriented credit advisory services should be avoided, just because a company calls itself not-for-profit does not mean it’s legitimate. As a matter of fact, many companies claim nonprofit status just to disarm people’s reasonable skepticism.
Enter the Federal Trade Commission
Very recently, the Federal Trade Commission implemented a new rule to guard against predatory “debt management” services. In late 2010, the FTC banned the practice of charging consumers before they’ve been assisted with their finances.
With the new rules, agencies selling debt management services that do business on the phone are only allowed to charge their clients when they’ve done all of the following:
- Altered of the conditions of at least one active debt held by the client.
- Drafted a new contract for how the lender and borrower will conduct themselves as regards the debt in question
- Guided the customer through one or more payments of the newly-drafted agreement
How will these new rules affect people looking for debt relief services? Ultimately, they should make it more difficult, and ideally impossible, for debt relief agencies to make irresponsible promises to lure panicked debtors into paying otherwise unthinkable costs for relief that ultimately doesn’t come. In this case, banning front-end fees means that those offering services are at least somewhat responsible for getting results for their clients. It will probably lead to a decrease in solicitations for too-good-to-be-true debt management schemes.
Stay skeptical
Another FTC rule was drafted in September of last year mandating that agencies selling debt management services specifically enumerate what they will do to assist their clients, a further safeguard against promising exaggerated results. Namely, they will need to lay out the cost of the relief they’re offering, a timetable for seeing a return on that investment, any hazards or pitfalls along the way, and whether they will be establishing specific accounts to pay down debts, assess charges, etc.
While this increased regulation is ultimately good for consumers, it certainly does not herald the end of predatory debt relief. While the Federal Trade Commission is on your side, nothing can replace a sharp, critical skepticism. If you’re considering establishing a relationship with any provider of debt relief services, do a background check to make sure that they’ll be working for you, not just fattening their bottom line at your expense.
The National Federation for Credit Counseling can be a good resource in finding a reputable service to lessen your credit difficulties. And with that assistance, it will be that much easier to re-establish your financial life and rebuild your credit score.
