Debt Counseling Companies
Radio and Television adds abound promoting various companies that claim to resolve your debt problems. They basically consist of two different methods: credit counseling companies and debt settlement companies. Each one has various problems.

Credit counseling companies (such as the non-profit “Consumer Credit Counselors”) set up a debt repayment plan with your creditors. You pay the debt back in full. The counselor may obtain a reduction in the interest rates during the duration of your plan, which is typically 5 years. The credit card companies pay the counselor to help them get fully paid. The problems with these counseling companies is that although interest may be reduced, it is reduced individually by each creditor to different amounts. Some may reduce their interest from 19.9 to 12.9, others from 15.9 to 11.9, etc... . Very few, if any, will reduce interest to a fair level (i.e., under 6%). Some will not reduce it at all. Another problem occurs if you default. Many credit card companies will immediately “default” you to an even higher interest rate than you were before you entered the program; some will re-commence collection activity against you without giving you a second chance.

A third problem is the effect on your credit score. In many cases, your credit score will be negatively affected for a period of seven years after you have completed your last payment. This will cause 12 years of negative credit rating if you remain in a 5 year plan.

A fourth problem that occurs is that some credit card companies may refuse to participate in the counseling program (it is voluntary on their part). That may result in one or more of your creditors pursuing collection activity against you while you pay monthly to the others that agree to the program. Obviously, this situation is doomed to fail.

Debt settlement companies are a different breed altogether. These companies promote that they will settle at “50%” on the dollar; “30%” on the dollar, etc. .... I have noted numerous negative experiences with these companies from my clients, who have reported various problems.

Settlement companies typically charge you a substantial fee to “enroll,” typically $1,000.00 to $2,000.00. This represents a “non-refundable” fee to the settlement company. Thereafter, you are placed on a payment plan to the company, which then charges you typically 15% of each payment they receive for “handling fees.” As you pay in, they don’t pay anybody. Your creditors become anxious and start calling and harassing you; you refer them to the settlement company who usually ignores them. Your credit reports begin to suffer from the negative reporting. After months of this activity, the settlement company will contact one exasperated credit card company and offer 50%, which, by that time, may or may not, be accepted. If accepted, you typically are again charged a fee by the settlement company averaging 25% of the amount they “saved you.” If not accepted, you probably will be sued. As you can see, these settlement companies are good at charging you plenty for their services, which are questionable at best. Check out the Better Business Bureau before you engage any of these companies. See what other people have to say. It is not unusual for the credit card company to simply refuse the proposed settlement, and proceed to sue you anyway. Good luck obtaining a refund from the settlement company. And say “goodby” to any hope of maintaining a reasonable credit record. Be very cautious with these companies.

If you really are intent on paying your bills back, the obvious choice is to use “Chapter 13." This plan is federally supervised and Court approved. Debt is paid back with no interest. Credit card companies must participate. They cannot harass or sue you while you pay into your Chapter 13 Plan. Upon completion, you will receive a “discharge,” or full resolution of all your debt. Why use a questionable debt counseling company or debt settlement company with questionable results when the Chapter 13 procedure is and has been available to pay all your debts under Court supervision and protection? See heading under Chapter 13 of this site for more information on this procedure.