Google “debt relief” and about 6 million results will list in a flash. Radio ads and telemarketers push services and counseling products, and warn you to act fast.
But government-certified credit counseling services have a different piece of advice: Slow down. Don’t make hasty decisions when looking for financial assistance.
Karen Dettbarn, Albany branch manager for the nonprofit Consumer Credit Counseling Service, said clients have often come to her office after they have been hurt by companies that promised debt relief.
“There are a number of other organizations out there that advertise they are debt-settlement companies,” she said. “Some take monthly fees from clients, but they don’t pass it along right away to creditors.”
Consumer Credit Counseling Service is licensed by the New York State Banking Department and approved by the federal Department of Housing and Urban Development as a Comprehensive Housing Counseling Agency.
Dettbarn said for-profit debt-relief companies might be trying to negotiate a settlement offer with the credit card companies while holding onto the clients’ funds. “We’ve seen clients who have frozen accounts and garnished wages because they have been victimized by a debt-settlement company,” Dettbarn said. “Even if the company is able to reduce the amount of the credit card debt, it is often after the client’s credit rating has been damaged. People don’t realize they could negotiate a settlement on their own with the credit card company.”
Americans’ total credit card debt reached $951.7 billion in the first half of this year, according to the Federal Reserve. That’s up 8.2 percent over the previous year, and the highest amount ever recorded.
David S. Liebschutz, an assistant dean at Rockefeller College, the public policy school at the University of Albany, has studied issues related to poverty for more than a decade. He said unmanageable credit card debt can be a precursor to poverty for some people.
“People get themselves highly leveraged and then they fall behind and the problem snowballs out of control,” he said. “The worst thing to do is to do nothing. Make that call to the credit card issuer and say, ‘I’m in trouble.’ Most of the creditors will work out a payment plan. They don’t want to be saddled with bad loans.”
Dettbarn said sometimes the credit card companies will cut the amount of the debt, but there can be a downside: “There are tax implications. The government considers the portion of debt that was forgiven to be earned income,” she said.
In addition to the state Banking Department’s oversight of legitimate credit counseling services, the federal government provides resources to help consumers get out of debt.
The Internal Revenue Service lists accredited debt counselors on its Web site, www.irs.gov. The Federal Trade Commission is charged with law enforcement for credit counseling agencies that violate federal consumer protection laws, and the Department of Justice approves credit counseling organizations for pre-bankruptcy counseling.
The state Attorney General’s Office recommends consulting the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies to find an upstanding credit-counseling agency. The Consumer Credit Counseling Service, where Dettbarn is manager, is an arm of the NFCC.
With the economic downturn, many people have turned to credit cards to keep spending levels at what they consider to be normal. The number of credit cards and total debt of clients seeking help at the counseling service has increased dramatically in recent months, according to Dettbarn.
“Our average client now has nine credit cards with a total debt of about $47,000,” she said.
People who live beyond their means but manage to make at least minimum payments can feel like they’re making ends meet. But the financial house of cards can tumble quickly.
“We’ve seen government agencies and other employers cut overtime recently. For a worker who has survived and paid bills with that overtime money, the loss of overtime means everyday expenses now exceed income,” she said.
An unanticipated financial need or drop in income can be devastating for people living paycheck to paycheck. Car repairs or an uninsured medical bill can become emergency situations.
Rose Hampton is a certified credit counselor and a credit report reviewer with Family Financial Education Foundation, which advertises locally and around the country but is based in Wyoming. She said the company has clients from coast to coast, but each gets individual attention. “Even if you deal with a credit counselor in your hometown, you will probably only visit the office once and then conduct the rest of your business over the telephone or Internet,” she said.
FFEF is an accredited organization founded 17 years ago. “In addition to helping our clients get out of debt, we spend a lot of time on education and teaching them how to budget,” Hampton said.
The first step in the education process is examining a credit report. “In eight years of doing this job, I’ve never seen a credit report that didn’t have an error,” she said. “In many cases, getting a credit report corrected can raise a score and qualify the client for a loan or lower interest rate.”
Clients often don’t know they can reduce the interest rate they are paying on credit.
“I had one young lady who was paying 45 percent to a finance company for furniture. We only got that reduced to 21 percent, but it was still better than where she started. Creditors are trying to get as much as they can, so they are willing to reduce interest rates,” she said.
Another part of the process of reducing debt is setting up monthly payment plans that begin paying the lowest balance first.
“We call that a roll-up program,” she said. “When the lowest debt is paid, we take the money that was used for that bill and add it to the payment for the next lowest debt. Eventually the highest balance will be receiving a large monthly payment and the end will be in sight,” she said.
Hampton said the average age of the clients now being served is 41 and their credit card debt exceeds $10,000.
The payback program costs an average of $440 a month.
“But I also have clients in their 80s with terrible credit card debt,” she said. “Circumstances can get out of control at any age.”
One of the first exercises clients do is to examine every dollar they spend each week and look for areas to cut.
“For one couple, the wife gave up two stops at Starbucks each day and the husband quit smoking. Four years later, they were out of debt and had money to invest,” she said. “Financial problems are the biggest stress in a lot of marriages and getting on a program to get out of debt can save a marriage.”
She said sometimes a potential client will be found to be beyond help and she will have to advise them to seek bankruptcy.
“We’re very honest with them about the consequences of bankruptcy and then we refer them to agencies that can help them,” she said.