Sharks smell blood, vultures sense death, and scam artists know when consumers are drowning in debt. As we discussed last week, the credit counseling business is awash in shady offers and less-than-honest firms that actually make matters worse for debtors. And now, thanks to America's new bankruptcy law, more people than ever will be in the market for credit counseling.
Here's how to avoid the sharks.
First thing to know: There is a big difference between the 90-minute compulsory credit counseling sessions that bankruptcy candidates must now attend, thanks to federal law, and a full-fledged debt management plan offered by credit counselors and credit repair firms, says Liz Pulliam Weston, author of Your Credit Score and Deal With Your Debt.
The new congressionally mandated, bankruptcy-related classes are much more like "traffic school -- you are in and you are out," Weston said. The classes can even be taken over the Internet. Don't expect a whole lot of wisdom in these sessions. Hopefully, they won't last long enough to do much harm.
It's also important to know that most sessions with most credit counseling and credit repair firms you see advertising their services won't satisfy the bankruptcy requirement. The only agencies that will are listed at the U.S. Trustee Program Web site (click here). These agencies have been vetted by the Justice Department, and hopefully will be scam-free.
There's scams, and then there's bad advice
That's not to say these firms will do an equally good job of dispensing advice to those who are laden with medical bills and credit card debt. That's why it's important to ask the same questions whether you are filing for bankruptcy or just looking for help getting your monthly bills under control.
Ask how the company makes its money; ask how often clients end up eventually filing for bankruptcy; ask for a list of fees in writing. Ask employees about their backgrounds. If any of those questions make them squirm, run away. Many credit counseling mills hire just about anyone off the street. The counselor is probably no better at budgeting than you.
Other firms are compensated heavily by the credit industry, so they will be more interested in getting your money than in giving you good advice.
However silly this sounds, you'll have to make sure your bills will actually be paid. The dirtiest counseling firms take consumers' money under confusing terms, and keep most of it. Little, if any, goes to pay lenders. Later, consumers are shocked to find their debts have only increased. Get in writing a list of bills that will be paid, and don't assume they have been. Call your creditor on your own and make sure the money's gotten there.
Other signs you are not dealing with a reputable firm: Aggressive promises indicating you can get out of your debt without filing bankruptcy. Many creditors will lower interest rates as part of a negotiation, but it's rare they will forgive debt unless a judge tells them to.
Don't trust agencies that suggest you simply stop paying your lenders. The repairman is probably suggesting you attempt to create a brand-new credit file at the nation's credit agencies by obtaining a new Social Security Number or Employee Identification Number from the IRS. That's a bad idea that might land you in jail.
Will end up on your credit report
Another tricky tactic used by less-than-savory credit counselors: They'll dispute every item on your credit report, a process known as "reinvestigation" in the credit business. The hope is that some lendors will miss the paperwork, and you'll sneak out from under a few bills. It rarely works, and it can be illegal.
There are genuinely helpful credit counseling agencies out there. The industry's association group, the National Foundation for Credit Counseling, is hard at work trying to repair the industry's image.
But consumers should know that even the most-well intentioned repayment plans instituted by the most honest credit counseling firm will have consequences. A note is entered on the consumer's credit report indicating they are in credit counseling, according to Weston. While some credit scoring formulas ignore that note, others do not, and penalize the consumer. Some lenders that pull the full credit report will treat the notation as if the consumer is in Chapter 13 bankruptcy.
One expert's advice: Don't go
That's why the decision to undertake credit counseling should be made very thoughtfully. And in fact, Elizabeth Warren, author of The Two-Income Trap, thinks the decision shouldn't be made at all.
Her advice is simple: "Don't go."
"He who pays the piper calls the tune. When the credit card companies are paying for your credit counseling, they are the ones who will be helped," she said. Counselors will often give bad advice, such as suggesting a second mortgage, telling consumers to sell property that would be exempt, or to borrow from your family members, she said.
No matter how bad things are, do-it-yourself is the best policy, she said. Her book All Your Worth includes a chapter called "Financial CPR" in which she advises consumers to assess their situations, come up with their own repayment plans, and negotiate with creditors on their own.
"No one has the incentive to get it right the way you do," she said. "There is no advice you can give someone (to avoid bad counseling). The bad guys don't wear black hats."
If you have to go to credit counseling in order to file bankruptcy, attend the class but be sure to take legal advice only from your lawyer, who will have your interests in mind, she said.
Later this week: Surprise! Banks have figured out yet another way to sneak money out of your checking account. We all know it often costs money to get your own money at an ATM machine; but would you believe now it can cost you when you don't get money?