A credit counselor checklist Protect yourself from scam artists by being selective

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A credit counselor checklist Protect yourself from scam artists by being selective
With the recent controversies enveloping the credit counseling industry, you will have to be more selective than ever in finding a credit counseling firm to help you get a handle on your debt.

Credit counseling will have an increasingly prominent role in consumer finance because the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 requires consumers to undergo credit counseling before they file for bankruptcy.

The legislation, which President Bush is expected to sign, also will require consumers to complete a financial literacy course and additional credit counseling before their debts will be discharged.

"It is estimated that the new legislation will increase the number of people seeking credit counseling by 1.5 million per year, and I wouldn't be surprised to see a proliferation of credit counseling agency start-ups once the new law becomes effective," says Michael W. Anglin, head of the bankruptcy section at the Fulbright & Jaworski law firm in Dallas.

Legitimate credit counseling firms exist, but it's buyer beware.

"There is a scourge of fraudulent and deceptive credit counselors out there who are running nonprofit shells surrounded by for-profit related companies," says Ed Mierzwinski, consumer program director at U.S. Public Interest Research Group in Washington, a consumer advocacy group. "I'm very concerned that a lot of people are going to these hucksters."

The rapidly growing debt-services industry has been hit with a wave of scandals that's resulted in government regulators and state legislatures going after companies that have engaged in abusive practices and falsely promised relief from debts.

The Internal Revenue Service is cracking down on debt-service companies that abuse their nonprofit, tax-exempt status.

"Increasingly, it appears that some credit counseling organizations have moved from their original purposes, that is, to counsel and educate troubled debtors, to inappropriately enrolling debtors in proprietary debt-management plans and credit-repair schemes for a fee," IRS Commissioner Mark W. Everson said in recent congressional testimony. "These activities may be disadvantageous to the debtors and are not consistent with the requirements for tax exemption."

So here's what to look for, and how to protect yourself.

*Apply the 20-minute test. "If they don't talk to you and collect information about your situation for at least 20 minutes, look elsewhere," says Travis B. Plunkett, legislative director at the Consumer Federation of America in Washington.

Also stay away from credit counselors who pitch a product or service in the first 20 minutes of your initial meeting.

*Is the debt counselor offering you a range of options besides bankruptcy?

"Debt management plans don't work for everybody," Mr. Plunkett says. "If the credit counselor wants to be a truly objective, nonbiased adviser, they have to be even-handed about bankruptcy."

*Carefully read any written agreement that a credit counseling organization offers. It should describe in detail the services to be performed, the payment terms, including the total cost, how long it will take to achieve results, any guarantees and the organization's business name and address.

*Beware of high fees or required "volunteer contributions" that, with high monthly service charges, may add to your debt and defeat your efforts to pay your bills.

"During your first contact with the service, you should be told of any fees associated with the type of counseling you select," says Gail Cunningham, vice president of Consumer Credit Counseling Service of Greater Dallas. "If an organization will not assist you because a true hardship prevents you from paying the fees, look elsewhere for help."

*Avoid firms that promise a quick fix.

"It didn't take people 20 minutes to get into this debt. It's not going to take people 20 minutes to get out of debt," says Adam Brauer, general counsel at DebtSettlementUSA.com, a debt- settlement company. "It's a process."

*Check with the Better Business Bureau to see if a credit-counseling firm has had complaints filed against it and if so, how it's responded to those complaints.

*There shouldn't be upfront fees.

"If someone believes in what they do and believes in their program, they're willing to get paid over the course of the program," Mr. Brauer says.

*You, not the debt-counseling company, should be in control of the money you will pay your creditors.

"What you want is a company that allows you to hold your own money and not pay it out to creditors until they get a settlement for you," Mr. Brauer says.

Finally, don't go with the first company you hear about. Inquire about several debt-counseling firms.

"They're dealing with their financial future, and they have to be careful," Mr. Brauer says. "They have to go with a reputable company."

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