By ROSALIE RAYBURN Illustration by CATHRYN
CUNNINGHAM Of the Journal
Advertisements that offer to repair damaged credit can look like a lifeline to a consumer drowning in debt. Bankruptcy statistics show that the loss of a job, a health crisis or a divorce can swiftly turn the tables on a healthy financial situation. But all too often, people who seize at creditrepair promotions, hoping for relief, end up worse off than they started.
In 1951, a group of credit companies created the National Foundation for Credit Counseling to advise consumers on how to manage money and help them pay down debt.
They were supposed to work on a nonprofit model. In return for negotiating a payment plan, agencies are allowed to take a portion of the monthly sum consumers pay toward their loans to cover administrative costs. They also receive contributions from the creditors to whom the debt payments are distributed.
A law that took effect in October requires consumers to receive credit counseling before they can file for bankruptcy-court protection. Consumer groups say counseling can genuinely help people learn to manage their finances. Plus, if counseling enables consumers to pay off debt in a timely manner, it will improve their credit rating.
Some credit counseling agencies have earned a good reputation. For example, the Better Business Bureau of the Southwest inAlbuquerque has given three Albuquerque
Unfortunately for debtors, however, many counseling agencies offer little or no education, and debt management plans pushed by them leave consumers in worse financial shape than before. If payments are late, or if the consumer pays less than the full amount owed, then his or her credit rating will suffer.
"There is a new generation of credit counseling agencies charging outrageously high fees," said Travis Plunkett, legislative director for the Washington, D.C.-based Consumer Federation of America.
Plunkett fears the new bankruptcy law has increased the risk that consumers will become prey to unscrupulous credit counseling agencies.
Indeed, Jerry Shipman, president of the Better Business Bureau of the Southwest, believes the increased number of credit counseling complaints he's seen in recent months is driven by the bankruptcy law.
Federal agencies have responded to the growing concerns. In May, the IRS revoked or threatened to revoke the tax-free status of 41 agencies after an investigation revealed improper activities.
One of the questionable tactics involved making cold calls to people in poor financial shape to convince them a debt management plan would solve their problems.
Getting in deeper
That's what happened to Photany Sattanak, a waitress at the Bangkok Cafe inAlbuquerque
Florida-based Light House Credit Foundation called her at work offering to help her pay off $3,200 in credit card debt.
Surprised by the call, Sattanak nevertheless agreed to the offer. She arranged for $120 to be taken from her bank account each month and paid to Light House, beginning in December 2001.
She understood Light House would keep $38 of each month's payment and send the rest to the credit card company. According to Light House, Sattanak would be debt free within four years.
But early in 2005, she got a call from her credit card company saying she owed $3,753, hundreds more than the original amount she agreed to pay off.
The company explained that payments made by Light House had regularly arrived late, landing Sattanak with hefty late fees and interest.
She called Light House repeatedly to complain, but they offered no help and no refund.
"It was scary what they did to me," Sattanak said.
Lower interest
Not all credit counseling offers involve debt management plans. Some sales pitches lure customers with offers to help them get credit with lower interest rates.
Former real estate developer Dick Lusk said he had lousy credit after a change in federal rules put his business in a tailspin.
Lusk struggled for years, trying to pay off credit card debts that carried interest rates above 20 percent.
One day he got a phone call that offered a solution. The caller promised that his company, Zybertour, could help people like Lusk get lowinterest credit.
"I was sold on it - which was pretty stupid - but I thought it would really give me a chance to get lower interest rates, so I fell for it," Lusk told the Journal in a phone interview.
Lusk quickly accepted the caller's offer and - still on the phone - agreed to pay Zybertour the $500 initial fee. He even put the charge on his credit card.
Shortly after that conversation, Lusk received a mailing from Zybertour containing a list of banks and credit card companies that offered interest rates of around 8 percent. Lusk said the list was worthless to him.
"I knew that with my credit rating none of them would give me a credit card," Lusk said.
Feeling ripped off, he wrote to Zybertour'sFlorida
"They just said too bad," Lusk said.
Complaints
What Sattanak and Lusk didn't know, or bother to check, was the long list of complaints recorded against Light House and Zybertour by Better Business Bureaus inFlorida
Sattanak and Lusk were among 55 consumers who filed complaints about credit counseling agencies with New Mexico Attorney General Patricia Madrid between December 2000 and December 2005.
Action byMadrid
And 41 of the 55 consumers who filed complaints have received no refunds, according to records provided to the Journal by the Attorney General's Office.
"I hear all kinds of horror stories," said Vicky Van Horn, who runs the New Mexico Project for Financial Literacy. The nonprofit is approved by the federal Justice Department to provide counseling required by the new bankruptcy law that took effect in October.
"Boy, it's a 'buyer beware' thing," Van Horn said, commenting on how to choose a credit counseling agency.
Any time a credit counseling agency fails to pay a creditor on time, that action will negatively affect the debtor's credit score, she said.
She advises consumers to contact creditors directly to work out payment plans. There are free or low-cost options available to help consumers learn how to manage their finances.
Van Horn charges $25 for her classes. The State Bar Association inAlbuquerque
Checklist
If you agree to a debt management plan, make sure:
You read and understand details of any agreement before signing.
You can afford the payments.
Your creditors are willing to work with the credit counseling agency you choose.
Your debt payments are being made and are received on time.
Help inAlbuquerque
The Federal Trade Commission advises consumers to take action as early as possible to prevent debts getting out of control. It's often best to approach creditors directly to work out payment plans.
Advertisements that offer to repair damaged credit can look like a lifeline to a consumer drowning in debt. Bankruptcy statistics show that the loss of a job, a health crisis or a divorce can swiftly turn the tables on a healthy financial situation. But all too often, people who seize at creditrepair promotions, hoping for relief, end up worse off than they started.
In 1951, a group of credit companies created the National Foundation for Credit Counseling to advise consumers on how to manage money and help them pay down debt.
They were supposed to work on a nonprofit model. In return for negotiating a payment plan, agencies are allowed to take a portion of the monthly sum consumers pay toward their loans to cover administrative costs. They also receive contributions from the creditors to whom the debt payments are distributed.
A law that took effect in October requires consumers to receive credit counseling before they can file for bankruptcy-court protection. Consumer groups say counseling can genuinely help people learn to manage their finances. Plus, if counseling enables consumers to pay off debt in a timely manner, it will improve their credit rating.
Some credit counseling agencies have earned a good reputation. For example, the Better Business Bureau of the Southwest in
Unfortunately for debtors, however, many counseling agencies offer little or no education, and debt management plans pushed by them leave consumers in worse financial shape than before. If payments are late, or if the consumer pays less than the full amount owed, then his or her credit rating will suffer.
"There is a new generation of credit counseling agencies charging outrageously high fees," said Travis Plunkett, legislative director for the Washington, D.C.-based Consumer Federation of America.
Plunkett fears the new bankruptcy law has increased the risk that consumers will become prey to unscrupulous credit counseling agencies.
Indeed, Jerry Shipman, president of the Better Business Bureau of the Southwest, believes the increased number of credit counseling complaints he's seen in recent months is driven by the bankruptcy law.
Federal agencies have responded to the growing concerns. In May, the IRS revoked or threatened to revoke the tax-free status of 41 agencies after an investigation revealed improper activities.
One of the questionable tactics involved making cold calls to people in poor financial shape to convince them a debt management plan would solve their problems.
Getting in deeper
That's what happened to Photany Sattanak, a waitress at the Bangkok Cafe in
Florida-based Light House Credit Foundation called her at work offering to help her pay off $3,200 in credit card debt.
Surprised by the call, Sattanak nevertheless agreed to the offer. She arranged for $120 to be taken from her bank account each month and paid to Light House, beginning in December 2001.
She understood Light House would keep $38 of each month's payment and send the rest to the credit card company. According to Light House, Sattanak would be debt free within four years.
But early in 2005, she got a call from her credit card company saying she owed $3,753, hundreds more than the original amount she agreed to pay off.
The company explained that payments made by Light House had regularly arrived late, landing Sattanak with hefty late fees and interest.
She called Light House repeatedly to complain, but they offered no help and no refund.
"It was scary what they did to me," Sattanak said.
Lower interest
Not all credit counseling offers involve debt management plans. Some sales pitches lure customers with offers to help them get credit with lower interest rates.
Former real estate developer Dick Lusk said he had lousy credit after a change in federal rules put his business in a tailspin.
Lusk struggled for years, trying to pay off credit card debts that carried interest rates above 20 percent.
One day he got a phone call that offered a solution. The caller promised that his company, Zybertour, could help people like Lusk get lowinterest credit.
"I was sold on it - which was pretty stupid - but I thought it would really give me a chance to get lower interest rates, so I fell for it," Lusk told the Journal in a phone interview.
Lusk quickly accepted the caller's offer and - still on the phone - agreed to pay Zybertour the $500 initial fee. He even put the charge on his credit card.
Shortly after that conversation, Lusk received a mailing from Zybertour containing a list of banks and credit card companies that offered interest rates of around 8 percent. Lusk said the list was worthless to him.
"I knew that with my credit rating none of them would give me a credit card," Lusk said.
Feeling ripped off, he wrote to Zybertour's
"They just said too bad," Lusk said.
Complaints
What Sattanak and Lusk didn't know, or bother to check, was the long list of complaints recorded against Light House and Zybertour by Better Business Bureaus in
Sattanak and Lusk were among 55 consumers who filed complaints about credit counseling agencies with New Mexico Attorney General Patricia Madrid between December 2000 and December 2005.
Action by
And 41 of the 55 consumers who filed complaints have received no refunds, according to records provided to the Journal by the Attorney General's Office.
"I hear all kinds of horror stories," said Vicky Van Horn, who runs the New Mexico Project for Financial Literacy. The nonprofit is approved by the federal Justice Department to provide counseling required by the new bankruptcy law that took effect in October.
"Boy, it's a 'buyer beware' thing," Van Horn said, commenting on how to choose a credit counseling agency.
Any time a credit counseling agency fails to pay a creditor on time, that action will negatively affect the debtor's credit score, she said.
She advises consumers to contact creditors directly to work out payment plans. There are free or low-cost options available to help consumers learn how to manage their finances.
Van Horn charges $25 for her classes. The State Bar Association in
Checklist
If you agree to a debt management plan, make sure:
You read and understand details of any agreement before signing.
You can afford the payments.
Your creditors are willing to work with the credit counseling agency you choose.
Your debt payments are being made and are received on time.
Help in
The Federal Trade Commission advises consumers to take action as early as possible to prevent debts getting out of control. It's often best to approach creditors directly to work out payment plans.