Bankruptcy Alternatives

Debt Negotiation Programs

Debt negotiation is not the same thing as credit counseling or a Debt Management Plan (DMP). It can be very risky and have a long term negative impact on your credit report and, in turn, your ability to get credit. That's why many states have laws regulating debt negotiation companies and the services they offer.

The Claims

Debt negotiation firms may claim they're nonprofit. They also may claim that they can arrange for your unsecured debt--typically, credit card debt--to be paid off for anywhere from 10 to 50 percent of the balance owed. For example, if you owe $10,000 on a credit card, a debt negotiation firm may claim it can arrange for you to pay off the debt with a lesser amount, say $4,000.

The firms often pitch their services as an alternative to bankruptcy. They may claim that using their services will have little or no negative impact on your ability to get credit in the future, or that any negative information can be removed from your credit report when you complete the debt negotiation program. The firms usually tell you to stop making payments to your creditors, and instead, send your payments to the debt negotiation company. The firms may promise to hold your funds in a special account and pay the creditors on your behalf.

The Truth

Just because a debt negotiation company describes itself as a "nonprofit" organization, there's no guarantee that the services they offer are legitimate. There also is no guarantee that a creditor will accept partial payment of a legitimate debt. In fact, if you stop making payments on a credit card, late fees and interest usually are added to the debt each month. If you exceed your credit limit, additional fees and charges also can be added. All this can quickly cause a consumer's original debt to double or triple. What's more, most debt negotiation companies charge consumers substantial fees for their services, including a fee to establish the account with the debt negotiator, a monthly service fee, and a final fee of a percentage of the money you've supposedly saved.

While creditors have no obligation to agree to negotiate the amount a consumer owes, they have a legal obligation to provide accurate information to the credit reporting agencies, including your failure to make monthly payments. This can result in a negative entry on your credit report. And in certain situations, creditors may have the right to sue you to recover the money you owe. In some instances, when creditors win a lawsuit, they have the right to garnish your wages or put a lien on your home. Finally, the Internal Revenue Service may consider any amount of forgiven debt to be taxable income.

Tip-Offs to Rip-Offs

Steer clear of debt negotiation companies that:

  • guarantee they can remove your unsecured debt
  • promise that unsecured debts can be paid off with pennies on the dollar
  • claim that using their system will let you avoid bankruptcy
  • require substantial monthly service fees
  • demand payment of a percentage of savings
  • tell you to stop making payments to or communicating with your creditors
  • require you to make monthly payments to them, rather than with your creditor
  • claim that creditors never sue consumers for non-payment of unsecured debt
  • promise that using their system will have no negative impact on your credit report
  • claim that they can remove accurate negative information from your credit report

If you decide to work with a debt negotiation company, be sure to check it out with your state Attorney General, local consumer protection agency, and the Better Business Bureau. They can tell you if any consumer complaints are on file about the firm you're considering doing business with. Also, ask your state Attorney General if the company is required to be licensed to work in your state and, if so, whether it is.

From the Federal Trade Commission

Credit Counseling and Counseling Organizations

Choosing a Credit Counselor

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Living paycheck to paycheck? Worried about debt collectors? Can't seem to develop a workable budget, let alone save money for retirement? If this sounds familiar, you may want to consider the services of a credit counselor. Many credit counseling organizations are nonprofit and work with you to solve your financial problems. But beware--just because an organization says it is "nonprofit" doesn't guarantee that its services are free or affordable, or that its services are legitimate. In fact, some credit counseling organizations charge high fees, some of which may be hidden, or urge consumers to make "voluntary" contributions that cause them to fall deeper into debt.

Most credit counselors offer services through local offices, the Internet, or on the telephone. If possible, find an organization that offers in-person counseling. Many universities, military bases, credit unions, housing authorities, and branches of the U.S. Cooperative Extension Service operate nonprofit credit counseling programs. Your financial institution, local consumer protection agency, and friends and family also may be good sources of information and referrals. Choosing a Credit Counseling Organization

Reputable credit counseling organizations advise you on managing your money and debts, help you develop a budget, and usually offer free educational materials and workshops. Their counselors are certified and trained in the areas of consumer credit, money and debt management, and budgeting. Counselors discuss your entire financial situation with you, and help you develop a personalized plan to solve your money problems. An initial counseling session typically lasts an hour, with an offer of follow-up sessions.

A reputable credit counseling agency should send you free information about itself and the services it provides without requiring you to provide any details about your situation. If a firm doesn't do that, consider it a red flag and go elsewhere for help.

Once you've developed a list of potential counseling agencies, check them out with your state Attorney General, local consumer protection agency, and Better Business Bureau. They can tell you if consumers have filed complaints about them. (If they don't have complaints about them, it's not a guarantee that they're legitimate.) Then, it's time for you to interview the final "candidates."

Questions to Ask

Here are some questions to ask to help you find the best counselor for you.

What services do you offer?
Look for an organization that offers a range of services, including budget counseling, and savings and debt management classes. Avoid organizations that push a debt management plan (DMP) as your only option before they spend a significant amount of time analyzing your financial situation.

Do you offer information? Are educational materials available for free?
Avoid organizations that charge for information.

In addition to helping me solve my immediate problem, will you help me develop a plan for avoiding problems in the future?

What are your fees? Are there set-up and/or monthly fees?
Get a specific price quote in writing.

What if I can't afford to pay your fees or make contributions?
If an organization won't help you because you can't afford to pay, look elsewhere for help.

Will I have a formal written agreement or contract with you?
Don't sign anything without reading it first. Make sure all verbal promises are in writing.

Are you licensed to offer your services in my state?

What are the qualifications of your counselors? Are they accredited or certified by an outside organization? If so, by whom? If not, how are they trained?
Try to use an organization whose counselors are trained by a non-affiliated party.

What assurance do I have that information about me (including my address, phone number, and financial information) will be kept confidential and secure?

How are your employees compensated? Are they paid more if I sign up for certain services, if I pay a fee, or if I make a contribution to your organization?
If the answer is yes, consider it a red flag and go elsewhere for help.

From the Federal Trade Commission

Loan Modification Programs

Housing Plan Creates Opening for Scammers

Borrowers Who Hire Firms to Renegotiate Mortgages Rarely Come Out Ahead

By JAMES R. HAGERTY | The Wall Street Journal

President Barack Obama's foreclosure-prevention plan, announced last week, is designed to give several million troubled borrowers another chance to lower their mortgage payments. But government officials and counseling agencies warn that it also presents a golden opportunity for firms to fleece unsuspecting borrowers.

Over the past few years, there has been a proliferation of firms that charge fees for what they promise will be quick results in negotiating with banks to get easier loan terms. In many cases, the firms take the homeowner's money but never deliver the services promised. Even when the firms do deliver what they promise, they charge fees -- often more than $1,000 -- for services borrowers can receive free. In July, Congress increased to $360 million the funds it has allocated for foreclosure-prevention counseling to organizations that provide the service without charging consumers.

"Borrowers don't need to pay anybody," says William Apgar, a senior adviser to Shaun Donovan, President Obama's new secretary of housing and urban development. But Mr. Apgar and others fear that the recent headlines about the Obama housing plan will prompt more consumers to seek help in the wrong places.

Under the Obama plan, the government will offer incentives and subsidies to persuade mortgage-servicing companies to offer lower monthly payments to borrowers in danger of losing their homes to foreclosure.

The publicity about the plan could be "the greatest advertisement of all for these scamsters," says John Ryan, an executive vice president of the Conference of State Bank Supervisors, which helps coordinate bank regulators. But he adds that his group is working with state and federal regulators to alert consumers and crack down on scams.

Home Truths

The Federal Reserve recently issued advice for people seeking to modify their mortgage:

* Work only with HUD-approved nonprofit counselors. (See www.hud.gov.)
* Don't agree to pay a fee before you are provided with the promised service.
* Beware of people offering "guaranteed" results.
* Don't sign blank forms or documents you haven't read.

In the meantime, fee-charging loan-modification firms "are popping up everywhere," says John Snyder, a manager at NeighborWorks, a nonprofit group formed by Congress to support community-revitalization organizations. In California alone, the state Department of Real Estate has reviewed fee-agreement forms submitted by nearly 300 firms touting loan-modification or similar services and has posted them on its Web site. (The department says it doesn't endorse the firms or their services.) Cable-television stations also have been running ads for services that charge fees, many designed to look as if they come from government agencies or other trusted entities.

Consider the case of Marilyn Elias, a retired medical-records manager in Tempe, Ariz. Last September, when she was exploring ways to reduce her mortgage payments, Ms. Elias's son told her about a company called GSA Mortgage in Phoenix that he thought might be able to help her. She says she paid upfront fees totaling $1,455. "All they did was take my money," says Ms. Elias, a widow. "They haven't done one thing."

In addition, she says, an employee of the firm advised her to skip payments on her mortgage while waiting for a loan modification. That, she says, caused her credit score to plunge, even though she has since caught up with the payments. GSA Mortgage didn't respond to repeated requests for comment.

Wendy Brooks, a mortgage broker for Scout Mortgage in Scottsdale, Ariz., is trying to help Ms. Elias get a loan modification from the company that sends out her monthly mortgage bill, Aurora Loan Services. Ms. Brooks says she won't charge Ms. Elias anything for that help. A spokeswoman for Aurora declined to comment on Ms. Elias's loan.

Jeff Pasquale, an aircraft technician who lives in Lancaster, Calif., says he first tried to deal directly with his mortgage lender, Wells Fargo & Co., to negotiate lower payments. "I tried to handle it myself, and they started jamming me around," he says. He says he didn't seek a free HUD-approved counselor because a colleague had tried that without success.

Instead, Mr. Pasquale says he paid $1,100 about a month ago to a firm called U.S. Loan Assistance Center in Orange, Calif., which he found on the Internet. He says he believes the firm will deliver on its promises and is awaiting the results.

Eric Dena, processing manager at U.S. Loan Assistance Center, says Mr. Pasquale's payment is being held in a trust account until the firm's work is completed. He said his firm works faster than nonprofit counselors.

A spokeswoman for Wells said she couldn't discuss the specifics of Mr. Pasquale's situation, but added: "Wells Fargo encourages borrowers to work with us directly or a nonprofit housing counselor. We see no advantage to hiring third-party companies."

Borrowers are tempted by these firms partly because banks often don't have enough trained staff to cope with all of the calls they get from desperate homeowners and because nonprofit counselors don't always provide good service, says Jack Guttentag, a professor of finance emeritus at the University of Pennsylvania's Wharton School. He operates a Web site that offers free mortgage information called mtgprofessor.com.

In theory, Mr. Guttentag says, it might make sense for some people to pay a modest fee for help in negotiating with banks. But he has found no way to determine which of the fee-charging firms are legitimate. Mr. Guttentag suggests that borrowers first try calling their loan servicers for help. If that doesn't work, he says, borrowers can try to get a free, government-approved counselor. One way to find those is to call the mortgage industry's "Hope Hotline" at 888-995-4673 or click on www.hopenow.com.

Firms that charge big fees for helping with loan modifications are just the latest potential trap for people facing foreclosure. In recent years, many distressed borrowers have fallen for "foreclosure rescue" schemes in which firms or individuals promise to help them avoid foreclosure through arrangements that involve transferring the title of their home to the supposed rescuers.

Rather than solving the problem, the deals typically resulted in the rescuer stripping the remaining equity in the home. As many of today's troubled borrowers have little or no equity remaining in their homes, fee-based loan-modification schemes have eclipsed foreclosure-rescue ones, says Mark Kaufman, Maryland's deputy commissioner of financial regulation.

The Federal Reserve and the Federal Trade Commission have published warnings about what they call "foreclosure scams." State attorneys general also are issuing warnings and in some cases prosecuting firms alleged to have cheated borrowers. U.S. Sen. Herb Kohl, a Wisconsin Democrat, has introduced legislation that would bar "foreclosure consultants" from collecting fees before they complete promised services. Some states, including California, Maryland, Iowa and Florida, already have laws with restrictions on upfront fees for these services.

The Wall Street Journal