Can you deal down debt?

Professional 'negotiators' may promise quick fixes. But the best counselors aim at roots of debt.

The holidays will be a little less stressful for one 22-year-old Rhode Island woman. In October, she was buried under $18,592 in outstanding debt with eight different credit cards, including one that charged 27.99 percent in annual interest.

Counting missed payments and penalties, creditors were demanding $7,244 immediately, a daunting sum for someone just entering the workforce. So she turned to a credit counselor for help.

Consumer Credit Counseling Service of Southern New England put the woman on a strict budget. Then, with her blessing, the Providence, R.I.-based nonprofit agency did something more: It persuaded her creditors to reduce or eliminate interest charges. Without intervention, she would have owed $31,736 over five years. But now, this cash-strapped Rhode Islander will pay $24,623 over four years - saving her more than $7,000 if she keeps up the $523 monthly payments.

If the pre-holiday season drives consumers in droves to retailers, the post-holiday period will likely boost the number of consumers who will head to the offices of organizations like CCCSSNE.

Amid continuing layoffs and holiday-season spending pressures, credit counselors expect plenty of shoppers to use their credit cards in the coming weeks. The result: more Americans deeper in debt.

Even before the current economic downturn, consumer debt had been soaring. Credit-card debt more than doubled between 1994 and 2001, according to, a credit-card tracking network. It reports that although many made real inroads on debt in the summer of 2001, Americans carried an average credit-card balance of $8,488 per household at mid-year 2001 - or a staggering $602.9 billion owed to the major card issuers VISA, MasterCard, American Express, and Discover. By the end of 2000, credit-card delinquencies had hit 5.4 percent, according to the American Bankers Association, an industry trade group.

To handle this staggering debt load, consumers are increasingly seeking out credit counselors, whose debt reduction plans disperse portions of a monthly lump sum payment by consumers to each of his or her creditors. Counselors also negotiate with creditors to reduce a client's interest rates or to waive over-limit penalties and late charges. In addition, a counselor may get creditors to "re-age" an account, that is, to require immediate payment for only the current month, even if the borrower has missed previous installments. Creditor concessions can lower monthly payments and put more money toward principle than interest charges and penalties.

Fueled by a provision in proposed bankruptcy-reform legislation now before Congress that requires a credit counselor's aid, the counseling business is booming. A decade ago, only about 200 credit-counseling agencies existed in the US, according to Bill Cullinan, interim president and CEO of the National Foundation for Credit Counseling, a Silver Spring, Md., association that accredits agencies and certifies counselors. Today, that number has jumped to 800 agencies, including the 164 organizations affiliated with the NFCC.

But consumer-affairs experts say debt-ridden consumers are becoming vulnerable to deceptive or unscrupulous credit advisers, which often use flashy TV and Internet ads to solicit business. To meet state laws, credit counselors apply for nonprofit status in the eyes of the IRS, leaving unwary consumers to believe they're safe from paying exorbitant service fees.

Not so, according to Eric Friedman, investigative administrator for the Montgomery County Consumer Affairs Office in Rockville, Md. "Consumers hear 'nonprofit' and they think, 'the Red Cross. Here, take my blood,' " he says.

Nonprofit status also doesn't prevent some agencies from funneling millions of dollars in payment-processing fees and loans to for-profit affiliates. In addition to fees from consumers, most counselors also receive money from creditors, usually about 8 percent of the recovered debt. "Many consumers don't know credit counselors are getting money from Visa and MasterCard," Mr. Friedman says.

Consumer advocates also hear consumer complaints over how payments get distributed. Rather than doling out a consolidation program's first-month payments to creditors, some agencies pocket the money as a service fee. This puts an already late-paying consumer another month behind. Counselors may also hide requirements for "voluntary" contributions in the fine print of contracts, leaving consumers liable for added, unanticipated monthly expenses.

Not all credit counselors attract complaints, and legitimate counselors can put an end to spiraling debt. "Consumers win because they receive budget assistance and have a payment structure, without receiving collections calls and letters," says William Lund, director of Maine's Office of Consumer Credit Regulation, Augusta.

The nationwide CCCS offices receive positive ratings from consumer officials, as do other agencies accredited by NFCC. Counseling fees among NFCC-endorsed agencies are typically $50 or less, while the monthly fees for debt-reduction plans average about $11 per month. Consumer experts say other agencies charge setup fees equivalent to a consumer's monthly payment, often $600 to $1,000. But almost all agencies, NFCC-backed or not, receive a percentage from creditors based on debts collected. NFCC associates alone sent about $2.5 billion in debt payments to the credit industry last year.

No matter how much the counseling service costs, creditors offer little "wiggle room" for negotiating special deals with individual consumers. William Hylan, manager of telephone counseling at CCCS/SNE receives a regularly updated list of what concessions are offered by more than 10,000 creditors, which range from banks to department stores. "The goal is to get the debt paid off completely," Hylan says. "The plans typically have a four- to five-year payoff."

Hylan's negotiators create a formal plan based on this list, and send the proposal to creditors asking them to approve it for a particular client. Only in rare cases do negotiators speak with creditors to attempt nonstandard concessions. (Some debt negotiators have built their businesses around persuading creditors to settle with debtors, taking their own fee on a contingency basis, but such deals often come at a cost to one's credit rating.)

In general, concessions don't come easily. Creditors may require the counselor to supply a detailed financial snapshot of the borrower. These reports often come with belt-tightening specifics about where the consumer promises to reduce nonessential spending, like cable TV subscriptions or daily lunches at restaurants. To prove his or her sincerity, the consumer may be put on probation: He or she must successfully make three months of on time payments before the concessions kick in.

Mr. Cullinan says about 275,000 consumers signed up for debt-reduction plans at NFCC accredited agencies in 2000, about the same number of plans that were closed. Because some consumers pay off their bills earlier than expected while others backslide, Cullinan says NFCC can't track success rates.

But CCCSSNE manager Ara Berberian has his own benchmark for success: "Wealth isn't what you have," he says. "It's what you don't owe."

Taking the self-service approach

Credit-counseling services can help fight off collection calls and squeeze interest-rate concessions out of creditors. But even the most economical of these services can add to your monthly expenses. And credit counselors don't have any special legal power to squeeze out concessions, though some negotiators insist that third-party mediation can lead to favorable settlements.

So how can you help yourself?

First, develop a thorough understanding of your financial situation. Tally all your monthly expenses, from the most obvious items, like rent or mortgage, to all the nickels and dimes that disappear each day for impulse buys for donuts or chewing gum. Don't forget expenses that may not arise every month - car repairs, for example - that can destroy a long-term budget.

Compare your expenses with your household income. If you're spending beyond your means, cut out nonessentials and keep a record of these cutbacks. This can help show creditors you're serious about controlling your spending.

Next, carefully review your credit-card bills. Check for the current interest rate being charged to your account. Even if you received a low rate when you originally opened the account, a single late payment may have prompted your creditor to impose a punitive rate of 24.5 percent or higher.

Just paying the minimum amount creditors require each month barely puts a dent in the principle you owe. If you're payments are late, or if you are over your credit limit, you're probably paying an additional $29 a month in penalties for each of these breaches.

When you call your creditor's customer service department, explain your financial hardship and the steps you've taken to get your budget under control. Then ask them to waive or reduce interest rates in return for your commitment to keep your account current. If necessary, ask them to "re-age" your account, to essentially make the account current even if you've missed a minimum payment.

Creditors may also agree to reduce the minimum monthly payment. Note, however, that many creditors require you to make three consecutive months of on-time minimum payments as a sign of good faith before the concessions take affect. Also remember that some companies refuse to grant concessions, even when they're negotiating with third-party credit counselors.

Alternatives to consider, traps to watch out for

Debt-repayment plans aren't the only tools short of personal bankruptcy that consumers have for reducing debt. Some consumers may not need to take any action beyond gaining a thorough understanding of their household income and expenses.

Reputable credit counselors often offer budgeting instruction for free or for nominal charges.

For more serious troubles, homeowners may consider a home-equity loan to pay off credit-card debts. Home-equity rates are usually lower than credit-card rates, and the interest is typically tax deductible. But unless you close the newly balance-free credit card accounts, or develop a new sense of financial discipline, you can find yourself with fresh credit-card debt, a second mortgage, and even more financial woes.

Susan Grant, a director with the National Consumers League, warns consumers to be wary of another alternative: so-called "credit doctors." These organizations often promise automatic approval for debt-consolidation loans or credit cards. But Ms. Grant warns consumers to be skeptical of such guarantees before a lender reviews their financial history.

"Any promises to get you out of debt or fix your bad credit should ring alarm bells," she says. "Traditional services don't make promises. They review your situation and help you if they can."

Although frowned upon by banking-industry groups such as the American Bankers Association, some companies like Debtco, in San Diego, offer to negotiate lump-sum partial payments of debts, for a fraction of the total owed, in return for an agreement by the creditor to close the account.

One drawback: The consumer's credit record shows the account was settled, rather than paid in full, which could have a negative effect on future credit requests. (The accounts can be paid in full at a later date, however, erasing that black mark.)

Debtco president Paul Killmar concedes that settlement isn't ideal, but says consumers benefit by not having to pay off the thousands of dollars that may have accrued through exorbitant interest rates and penalties, rather than purchases.

How to track down a counselor with 'the right stuff'

Consumers frazzled by bills and calls from collection agents may be daunted when looking for the best services and the lowest fees among the hundreds of organizations of credit counselors now in business. Consumer experts say the key to finding a reputable counselor is to investigate candidates thoroughly and avoid making snap decisions.

The National Consumers League advises consumers to seek out agencies accredited by the National Foundation for Credit Counseling (, a Silver Spring, Md., counseling accreditation organization.

Next, check with state and local consumer protection agencies, the state attorney general's office, and the Better Business Bureau to see if the agency you're considering has had any complaints filed against it.

A growing number of states now require licensing and bonding of credit counselors. Confirm with the local consumer regulation agency or attorney general's office that each counselor you're investigating is legally registered to operate in your state.

Seek out counselors with local offices. If problems arise, state and local regulators can help you solve grievances. Counselors that use telemarketing campaigns and the Internet to find new customers may be based in distant states, or even other countries, and subject to lenient regulations.

No matter how dire your financial situation, resist the pressure to sign any contracts without taking the paperwork home and reviewing all terms and conditions.

Make sure you identify all setup, payment-processing, and "voluntary" fees. Discuss the contract with your spouse, attorney, or accountant.

Avoid counselors who only want to enroll you in a debt-reduction plan. Any payment program should be a component of a larger effort to develop a personal budget and to gain a thorough understanding of your income and expenses.

Finally, understand that a debt-repayment plan isn't a magic cure for financial distress. If necessary, seek out additional professionals who can identify deeper causes for financial problems.

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