The Cutting Edge: Avoiding Credit Consolidation Scams

Don't get swindled trying to settle your debts

authorities, and branches of the U.S. Cooperative Extension Service operate non-profit credit counseling programs, says the FTC. Your financial institution, local consumer protection agency, and friends and family also may be good sources of information and referrals. You can also check with the highly reputable Consumer Credit Counseling Service for a local branch.

DETERMINE WHETHER A DEBT MANAGEMENT PROGRAM (DMP) IS RIGHT FOR YOU: With a DMP, you deposit money each month with the organization, which uses your deposit to pay your unsecured debts. DMPs will negotiate lower interest rates with your creditors, and even though they cannot talk down the interest rates on student loans, they will still help you manage your payments. If a credit counselor tries to enroll you in a DMP without taking the time to review your financial situation, consider a new counselor. If a credit counselor offers to enroll you in a DMP without teaching you budgeting and money management skills, change services immediately.  Visit the Consumer Education Services Inc.’s Website MyCesi.org, for more on DMPs.

STEER CLEAR OF DEBT SETTLEMENT COMPANIES: You’ve probably seen the “eliminate your debt,” infomercials while up late night worrying about your finances. While the promise of making your debt disappear in a few easy steps may sound tempting,  if the company is offering “debt settlement” it’s more than likely a scam that’ll have you in a deeper hole.

Here’s how it works: You send the money to the organization instead of the creditor. But many of the initial payments go directly to the settlement company as a fee and not to your creditors! What’s worse, the companies negotiate a settlement for cents on the dollar. Say you owe $10,000, once you’ve sent them $5,000 (however many months that takes), they’ll then call your creditor and say ‘hey, this person owes $10,000 but we can give you $5,000 right now, and call it even.” While they’ve been stashing your cash, you’ve continued to run up over-the-limit fees, late fees and other penalties on already out of control debt.

“A legitimate credit counseling agency will offer financial education,” says Cunningham. “We supply them with the tools so they can lead a more financially stable life.”

Check out these government sites specifically for consumers grappling with debt:

U.S. Department of Justice offers a list of government approved credit counselors

Consumers Credit and Budget Counseling Inc. offers free debt advice and access to counselors.

Renita Burns is the editorial assistant at BlackEnterprise.com.

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