Credit Counseling Crisis
National Legal Debt Centers, Inc. issues Consumer Alert
(PRWEB) February 17, 2005 -- National Legal Debt Centers, Inc. (www.nldc.us) Consumer Alert! There is a severe financial crisis now in the Consumer Credit Counseling (CCC) Industry, with many either going out of business or being closed by government agencies. And, its estimated that 10 million Americans annually who enter CCC programs will be left out in the cold.
Two years ago in a report detailing the severe threat to consumers from a new generation of credit counseling agencies, the National Consumer Law Center (NCLC) and Consumer Federation of America (CFA) stated that Credit Counseling is in a Crisis. The comprehensive study found that, unlike the previous generation of mostly creditor-funded counseling services, these new agencies often harm debtors with improper advice, deceptive practices, excessive fees and abuse of their non-profit status.
The report also concluded that creditor practices and funding reductions have caused agencies to cut back on educational services and have led more consumers to drop out of counseling and declare bankruptcy. Another key finding was that poor oversight of credit counseling agencies by the Internal Revenue Service and the states has allowed unscrupulous counseling agencies to grow and prosper.
"The findings of this report show that the credit counseling industry has undergone an alarming transformation in the last decade," said Deanne Loonin, Staff Attorney for the NCLC. "Aggressive firms masquerading as 'non-profit organizations' are gouging consumers. Deceptive practices and outright scams are on the rise," she said. "More consumers are getting bad advice and access to fewer real counseling options. Meanwhile, most state and federal regulators appear to be asleep at the switch."
Major Problems With Credit Counseling:
Consumer Credit Counseling (CCC) companies were established back in the early 80's when credit card companies started to notice that many people were having problems making their minimum payments and were starting to default on their debt. At that point there was very little a consumer could do to get financial relief (except for filing bankruptcy) so the credit card companies helped establish and fund CCC organizations in order to recover their money from people struggling to make ends meet. Acting as separate organizations from the creditors, they were able to put on a friendly face and claim they were established to help the consumer lower their debts. Don't be confused, this type of company never negotiates down the principle balance of your debt.
These CCC organizations work for the creditors, not you. They are just like a collection agency. In addition to what the creditors pay the CCC company, they charge you a monthly service fee for dispersing your money to your creditors. Until recently these companies were paid a commission of around 12% to 15% by the creditors for recovering the debt for them. That means for every dollar you give to them, the creditor was giving 15 cents back to the CCC company. This changed in 1999. According to an article in the Los Angeles Times "too many people were using CCC companies just to lower their interest rates" and as a result the creditors were cutting the commissions paid to the CCC companies to 8%.
The net result of cutting the commission to CCC programs was that many of the CCC companies became unstable (thus the poor reputation that ensued). Some of them could not make the consumer's payments to the creditors on time or, in rare cases, at all. Consumers started seeing late charges accumulate, and in the worst-case scenarios payments were either far less than what was agreed to or some payments were missed altogether. (Several well-known credit card issuers refuse to work with any CCC company.)
The main problem with CCC programs, and the main reason for failure in this type of program is that your monthly payments are usually going to be higher than your original minimum monthly payments AND you are going to have to sustain that payment for many years. If you are already having problems making your minimum monthly payments now, how are you going to afford a higher amount over a period of many years? For this reason it is very rare that anybody will complete the program in the specified time originally stated. Many people fall off the program two or three times, thus extending the original 4 to 5 year plan to 7 to 12 years!
Despite marketing efforts and glowing remarks to the contrary, CCC programs do affect your credit report, so don't be misled. When you are accepted into a CCC program your creditors will close your accounts and report this to the credit bureaus. Although this is far less damaging than bankruptcy, it definitely does impact your credit rating. Don't let anyone tell you otherwise, just to sell you their service! Instead, look into other options.
Contact: National Legal Debt Centers, Inc.: www.nldc.us
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References:
Consumer Federation of America article on the Credit Counseling Industry: http://www.consumerfed.org/040903ccreport.html
Debt Reduction Alternatives:
http://www.nldc.us/debtoptions.html
Credit Repair Information:
www.creditchampion.com
FTC Consumer Alert: Advertisements Promising Debt Relief May Be Offering Bankruptcy: http://www.ftc.gov/bcp/conline/pubs/alerts/bankrupt.htm
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