THE COLOR OF MONEY
If you need credit counseling, look for personal plan, low fees

By Michelle Singletary

Almost every day I get e-mail from a company peddling a get-out-of-debt plan.

One recent advertisement promised I could be debt-free in "3 Easy Steps."

Yeah, right.

Getting out of debt is rarely easy. The truth is it can be a painfully long journey back from the purgatory some debt can put you in.

And many folks are overwhelmed with debt these days, much of it because of credit cards. The average U.S. credit card debt per household in 2002 was $8,940.

As more people struggle with making even their minimum credit card payments, they are turning to credit counseling agencies for help.

These agencies serve as debt middle men. They negotiate with creditors on a debtor's behalf to, among other things, reduce the interest rate on a credit card or waive or reduce late fees and penalties. In return, debtors make one monthly payment to the credit counseling agency, which then forwards the money on to creditors.

In the past, credit counseling agencies rarely charged for their services because they got paid by creditors, who saw the debt plans as a chance to recoup what they were owed.

But so many consumers have signed up for debt plans, creditors have cut back on their payments to the agencies. Now people signing up for a debt plan are routinely charged a set-up fee and monthly fee. Some agencies now charge as much as a full month's consolidated payment — usually hundreds of dollars — to establish an account.

Most problematic, say consumer advocates, is the emphasis on debt consolidation and less on credit counseling. Instead, there has been a proliferation of agencies that critics call "debt mills," which try to sign up as many people as possible and put them in cookie-cutter debt programs.

If consumers aren't careful, they can end up in worse financial shape than before they signed up for these programs, contends a new report, "Credit Counseling in Crisis," by the National Consumer Law Center and Consumer Federation of America.

"There are a lot of good credit counseling agencies out there, but there are also a lot of bad ones," said Deanne Loonin, staff attorney for the law center.

The credit counseling report found that many agencies often harm debtors with improper advice, deceptive practices and excessive fees.

Here are some of the typical complaints outlined in the report:

• Debt payments weren't made or were sent late.

• Claims that fees for the monthly debt repayment plan are voluntary when they aren't.

• Excessive fees.

• Failure to adequately disclose fees.

Travis B. Plunkett, the legislative director of CFA, said no matter how desperate you are, take the time to evaluate all of your options before signing up with any credit counseling agency.

"Unfortunately, when people take too long to deal with their debt problem, they often act in panic," he said. "But that can be a big mistake. Take a deep breath. Call around and don't just respond to an e-mail or television ad."

According to the report, here are some reasons to reject an agency:

• High fees. In general, if the set-up fee for a debt plan is more than $50 and monthly fees are more than $25, look for a better deal.

• Unreasonable promises. Creditors, not agencies, determine what kind of concessions will be made. Many creditors are becoming increasingly unwilling to reduce interest rates for consumers who enter debt-management programs.

• Suggesting services are free. Some agencies will tell you that their fees are voluntary, but then will pressure you to pay the fees in full. If that happens, go somewhere else. Don't be pressured to pay up.

• Too short a relationship. Any agency that offers you a debt-management plan in less than 20 minutes hasn't spent enough time looking at your finances. Keep in mind that even if the agency is a nonprofit, it is not necessarily a do-gooder organization. An effective counseling session, whether on the phone or in person, takes a significant amount of time.

If you need more information, contact the National Foundation for Credit Counseling at (800) 388-2227. The member agencies also provide information online at www.debtadvice.org.

Can I give you a little advice? If you're in financial trouble because you're a poor money manager, a debt plan is just a temporary solution to a long-term problem you know you should get fixed. If you have to use a credit counseling company, find one that offers some real counseling.