Debt can get ahead of us sometimes
While it’s always better to DIY your own debt, it’s possible to get in too deep to dig out on our own. If you’re at the end of your financial rope and are having trouble covering even your minimum payments, it can feel overwhelming. You might have already tried to come up with extra cash, or you might not have the credit score needed to get good refinancing options.
And let’s face it. Life happens. Sometimes we are hit with a medical or tax expense that we didn’t see coming which throws everything out of whack and we can’t get back on track. Also, to be honest, some folks may simply need help understanding how to manage their finances and develop better spending behaviors.
Beware of wolves in sheep’s clothing
But before you give up and hire someone to help you, it is important that you understand the difference between credit counseling and debt repair services, and how they can either help or hurt you. There are a lot of predators in the “debt repair” arena. A decision to hire an outsider to help you with your money should never be taken lightly.
They advertise that they save you a lot. But they don’t. It took 3 years. They forced me to stop paying my credit card bills. That was the hardest part. I was talked into going into default. ~ Lisa W.
Never sign anything or agree to pay anyone to manage your debts for you until you are absolutely sure you know exactly who you are dealing with, and that you completely understand what they can and cannot do for you.
These are the good guys. Credit counselors don’t fix things for you, rather they work with you to help you come up with a plan of action so that you can get your finances in order and begin to tackle your debt. So, participation on your part is key. If you are considering looking into whether credit counseling services can help you, the Consumer Financial Protection Bureau is a good place to start. Use this resource to make sure you’re dealing with a reputable company rather than a wolf in sheep’s clothing.
What do they do?
- Provide education on budgeting and money management.
- Usually non-profit.
- Can help you manage your debts by making one payment to them and they pay creditors.
- Do not advise you to stop making payments on your debts.
- Can sometimes negotiate different terms with creditors: lower monthly payment/interest rate.
Who are they for?
Reputable credit counseling services can help people who are either struggling to make their minimum payments or are being hounded by debt collectors. They can offer you alternatives for paying down your debt, provide counseling and money management classes so that you can avoid going into debt in the future, and give you peace of mind.
Debt Settlement Companies
Debt settlement companies, aka “credit repair,” “debt repair,” and sometimes even “ethical credit hackers,” are anything but. Know the difference and understand what you’re getting yourself into. Many of these companies will have official-sounding names and they will advertise on well-known websites.
What do they do?
- Offer to settle your debts for you with creditors. (FYI, some creditors will not negotiate with debt settlement companies.)
- Charge a fee that they are not supposed to collect until after their services have been performed.
- Pay off your debts with a lump sum that you save in a separate account.
- Dispute all negative claims on your credit report (even though the only thing that can be “repaired” are those items that are truly incorrect.)
- Drag out the process so that you keep paying them a monthly fee.
- Advise you to stop making payments to your creditors, thereby forcing your accounts into delinquency so that they can negotiate a lower settlement amount. (FYI, this destroys your credit score and can result in you being sued.)
- If they negotiate a lower settlement, you can be taxed on the difference.
Who are they for?
In our opinion? Nobody. Debt settlement companies are very dangerous. Debt settlement companies claim that they can negotiate to lower your balance so that your overall debt repayment is less. But in order to do that, your account must be forced into delinquent status. This is why if you hire one of these scammers, they order you to stop making payments to your bank.
I could have done this myself. I could have worked with each credit card company and negotiated the same thing (or better) without ruining my credit. ~ Lisa W
Not only can debt repair companies really screw up your credit score, which can come back to bite you in ways you may not be aware of, but they can also land you in legal trouble. You can actually do what they charge you to do all by yourself, but it’s a bad idea to use their tactics. In addition, if even a portion of your debt is forgiven, it could be taxable by the Feds. So, please be very careful. Make sure that you understand what kind of debt counseling or repair service you are hiring. Sadly, there are some shady companies out there that prey on the most vulnerable consumers. A bit of research on your part can save you from making a bad situation worse.
How Credit Repair Ruined Lisa’s Credit
Lisa was at the end of her financial rope. She could no longer make her credit card payments and decided to seek help from a credit repair company. At first, they promised to save her a significant sum of money by negotiating with her creditors on her behalf. It turns out they did not save her money and instead made her life “a living hell.”
I cried a lot. There was a lot of phone time. What I learned: I have to advocate for myself. Don’t do it. You can do exactly what they did, yourself. And not ruin your credit in the process. ~ Lisa W,
Here are the missteps she took and wishes she could take back. The credit repair company:
- Charged her up-front and monthly. She entered into an agreement that had her paying the credit repair companies up-front and monthly. The Consumer Protection Bureau specifically warns against this and it is illegal in many states.
- Forced her to stop making payments on her bills in order to pressure the credit card companies into a settlement. Doing this ruined her credit.
- Offered her a high-interest loan to re-build. That’s right. The credit repair company asked her to refinance (up-front) the amount that they would eventually pay out, and at a ridiculously high rate. Talk about wolves in sheep’s clothing. Aren’t they supposed to be helping you get out of debt?
- Refused to let her settle. Even when she wanted to settle with the credit card companies (e.g. Walmart credit card offered her a good settlement), the credit repair company would not allow it. It took three years.
- Charged her 40% of the settlement after 3 years “of hell”. Her settlement was $10,000 in forgiveness. The credit repair company charged her $4,000. She could have kept the full $10K if she had negotiated on her own.
- On top of it all, she got a hefty tax bill for the full $10,000 in forgiven debt. That’s right. She had to pay the credit repair company $4,000 for their “service”, but paid taxes on $10,000. Months after settling her credit card debt Lisa received 1099-C (Cancellation of Debt tax notice). Why? Because the IRS considers debt that is canceled or forgiven as income.
Lisa wants to save you time, money and your sanity. She shared her story with us so that we learn from her experience. Hers is a word of warning about working with “credit repair” companies.
More from our lawyers: Well Wallet is an informational platform for personal finance, and unless specifically stated otherwise, the content is provided to you without charge. Well Wallet is not a financial planner, broker, or tax advisor. We cannot provide any advice for your specific financial situation. Our goal is to help you understand how to better manage your finances and how your finances affect your life goals, but we can never make any guarantees about your financial future (or present). The material here is meant for informational purposes only. It should not be considered legal or financial advice. See our Terms & Conditions for more information.