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February 2009

Be Wary: Credit Counseling in Tough Financial Times

Tough financial times are causing a number of “credit counselors” to advertise that they can help financially stressed consumers. The more questionable advertisements frequently state they can help you out of your extensive debts for “pennies on the dollar.”

A reputable credit-counseling agency has certified counselors who are trained on consumer credit, money and debt management, and budgeting. These firms typically are not-for-profit, and because of their tax status, have a legal obligation to provide education and counseling and annually report their activities to the federal government.

Unfortunately, not all “credit counseling” agencies provide reputable services. The Federal Trade Commission (FTC), the national consumer watchdog agency, confirms that things have not improved too much from the time when I served as Wisconsin’s top consumer protection official. Some credit-counseling agencies charge high fees—some of which are not disclosed—or urge consumers to make a “voluntary” contribution that could cause the consumer to actually fall further into debt. The FTC has also found that some agencies pressure consumers into signing debt-management plans and that a number of the firms claim that such a plan is your only option, before they spend time reviewing your specific financial situation and offer little or no consumer education and counseling.

The FTC and state attorneys general have brought suit against some of the worst firms and found that the companies deceived consumers about the cost, nature, and benefits of the services they offered and some companies also lied about their non-for-profit status.

Below are questions you should ask before working with a financial counselor:

What services do you offer? Seek counselors who discuss your entire financial situation with you and offer a range of services, including budget counseling, savings and debt-management classes.

Are you licensed to offer your services in my state? Check the Wisconsin Department of Financial Institutions web site to determine if the counseling agency is licensed by the state:  http://www.wdfi.org/fi/lfs/licensee_lists/Default.asp?Browse=ASC.
Do you charge for your services? Avoid organizations that charge for information about their services.

Will I have a formal written agreement or contract with you? Don’t commit to a debt-management plan over the telephone, get all verbal promises in writing, and read all documents carefully before you sign them.

Are your counselors accredited or certified by an outside organization?

Have other consumers been satisfied with your service? Are there any complaints about you with the Better Business Bureau or the State of Wisconsin?

What are your fees? Are there set-up and/or monthly fees, or are there fines if the fees aren’t paid by a certain date? Ask the organization to waive or reduce fees if you cannot afford them.

How are your employees paid? Are the employees or the organization paid more if I sign up for certain services, pay a fee, or make a contribution to your organization? Avoid firms that won’t tell you if they pay employees on a commission or receive compensation from creditors if you sign a debt-management plan.

What do you do to keep personal information about your clients (for example, name, address, phone number, and financial information) confidential and secure?

Credit counselors can be very helpful in a stressful situation. With the tools above, you will be better able to avoid those who will only make debt problems even worse. 

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