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Making Ends Meet, Part 3: Controlling debt becoming an issue for more and more families
A voice on the radio offers hope to the desperate. A simple phone call to the debt settlement company can stop harassing collection calls and eliminate a big slice of credit card debt.
"Find the secret credit card companies hope you won't discover," the reassuring male voice announces, offering a toll-free telephone number for Dallas-based Debt Consultants of America.
When an operator answers, he wants to know the debtor's name, ZIP code and total amount owed to unsecured creditors like finance companies, store charge accounts and credit cards. With that information, the caller is assigned to a representative, who wants to know specifically how much and to whom the money is owed.
But when asked for material in writing that details Debt Consultants of America's program and fees, the representative says he can't provide that and insists on knowing the caller's debts. When the caller replies that the information is private and won't be revealed without written details of Debt Consultants of America's program, the representative hangs up. On a call back, the representative again hangs up when the caller insists he wants details about the company before revealing private information.
That episode, which took place last week when the Southeast Missourian responded to a company advertising in Cape Girardeau, violates industry standards, said a representative for the debt settlement trade association. It should also stand as a warning to debtors, critics of the industry contend. Any company that won't reveal its programs and fees before a debtor reveals their personal information is suspicious, they said.
Debt Consultants of America did not return a call seeking comment.
Finding a way to control debt is an issue for more and more families as incomes fall due to layoffs. Nationally, almost 600,000 people lost their jobs in January as the unemployment rate climbed to 7.6 percent.
In Southeast Missouri, the latest figures are from December, when 12 percent more people were reported as unemployed than in November in a 10-county region. Initial filings for unemployment benefits were 80 percent higher in those 10 counties in December than they were in July. And 2008 saw 29 percent more bankruptcy filings in the Southeastern District of the U.S. Bankruptcy Court for Eastern Missouri.
Two types of companies offer help negotiating with creditors for lower interest rates and payments. One type, called credit counseling firms, are more typically not-for-profit, and many have standing agreements with credit card companies to reduce interest rates. Fees are typically modest.
The other kind of company is known as debt settlement, which has a more aggressive approach. A client typically puts money aside every month while the firm tries to negotiate a lump-sum payout with a partial forgiveness of the debt or substantially reduced payments. Fees generally reflect a percentage of the of debt eliminated.
The stress of making payments on debt accumulated while the economy was humming can be punishing, said John Hudak, executive director of the Community Counseling Center in Cape Girardeau.
When people seek debt help, they are often "in utter and absolute desperation," Hudak said. "It is a quite personal thing. They come in with a sense of failure, they come in with a sense of being hopeless."
Those fears are the fertile ground from which the debt settlement and credit counseling firms reap customers.
For people who have the income and willpower to stick to a plan, the results can be gratifying. Mindy Deson, a 25-year-old college graduate, said she became overwhelmed when her credit card debts reached $10,000. She was wary of the debt settlement companies.
"There is no way," she said, that credit card issuers "are going to make me pay only half of what I spent. If I had charges of $1,000 for new clothes and furniture, they are not going to say that. That is giving out free money."
At one point, Denson said, she got a finance company loan of $5,000 to pay off a credit card. When she tried to cancel it, the card issuer persuaded her to lower the limit to $1,000, which was soon spent, Denson said.
When she realized payments were exceeding her income, Denson researched companies and found American Credit Counseling. The first month in the program was tough because she had to make minimum payments on her credit cards and deposit enough money with the counseling firm to pay the first payment it arranged.
But now her payments are $268 monthly compared to $450, and she expects to be virtually debt-free in about three years. "They have been very helpful," Denson said. "I was really scared."
Others haven't been as satisfied. In reply to a Southeast Missourian online request for people to talk about their experiences, one woman who asked not to be identified wrote that she found herself overloaded with debts after a divorce. A debt settlement company promised to combine her payments and reduce the interest. After making two payments to the settlement firm, creditors began harassing her and said they had no agreement with the firm and expected to be paid while she was paying the settlement company. "By the fourth month, the amount the agency was demanding I pay was more than I was paying each creditor individually before and the agency was acting like a bill collector," she said.
The woman said she filed for bankruptcy.
The Missouri attorney general's office received 171 complaints about the debt settlement industry in 2008. The office instituted lawsuits against companies that defrauded people trying to avoid foreclosure, a law firm that promised relief from IRS debt and a company that solicited debt settlement business via telemarketing.
Financial fraud unit
Attorney General Chris Koster is creating a unit that will focus on financial fraud, said Travis Ford, Koster's spokesman.
"We expect it to get worse because of the economy," he said. "People are going to get squeezed and they are going to be more trusting and less careful than they should be."
The Association of Settlement Companies, the industry trade group, wants to weed out disreputable operators just as much as critics of the industry do, said Max Bruck of Find Your Customers, a firm that does marketing work for the association.
A firm should not overpromise, such as by claiming to be able to settle debt for 40 cents on the dollar, Bruck said. A reputable company should be wiling to provide a copy of its customer agreement and payment terms. And the industry's best practices dictate that money a client sets aside for lump-sum settlement payments be deposited in an account solely under the control of the client and not ask a client to pay anything but fees directly to the the settlement firm, he said.
While Bruck acknowledges many complaints are well-founded, he said many come from people impatient for results.
"Look out for false promises," he said. "You are probably not going to reach the first settlement until six months into the program, That generates a lot of complaints."
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