Credit-card-debt-management companies -- any good?

I’ve got a big credit-card debt and I keep seeing TV ads for services promising to “reduce your credit card debt” – what are they selling? A session with a debt counselor? A debt-consolidation loan? (If the latter it would only be worthwhile to the debtor if it lowers the interest rate – and why would the lender do that for an unsecured loan?) What? Whatever it is, is it worth the debtor’s trouble?

There ARE a lot of scam places out there, and it’s something to watch out for. One tactic is that they’ll tell you “oh you’re all set, here’s your new low payment” but without actually working with your credit card company, leaving you with problems when they get pissed and come after you.

However, there are some that do help a bit. My wife and I built up some nasty credit card debt a long time ago. It got to the point where we were missing payments left and right and our attempts to negotiate with the card issuers were not getting anywhere. What the counselling service did for us was to call each of the companies and, if possible, enroll us in a “debt repayment” plan (not all cards have this) that effectively closed the card and reduced the interest to a more reasonable level (as well as eliminating penalty fees). Only one of the four cards didn’t play nice with them on this and of course that’s the one we’re still paying off. The premise is that the counselling service will have more leverage to get better terms for you, to make things easier for repayment (in exchange for the assurance that you’re actually making an effort to pay back the debt).

What happens is we pay this counselling service one sum (agreed between us and the service as an amount we can actually pay) every month and it gets split between all of the cards. There is a cost to this, probably about 20 bucks or so a month. In return they make sure that the money is distributed to maximize repayment (more money to the higher interest accounts) and otherwise prevent us from any late payments.

Is it worth it? I don’t know. The debt is now all but paid off, and it’s hard for me to say in retrospect how much it helped. On the one hand, they didn’t do anything magic, but I did try initially to handle this directly with the credit card companies and didn’t seem to be doing very well. I suppose someone sufficiently motivated could do it on their own, though.

But, the reality is that the reason I was in trouble in the first place was the reason that I couldn’t get out of trouble: I was having trouble keeping on top of all the various payments. To that end, they were a great help. They were very rigorous, they only allowed automatic ACH transfers from my checking account as payment (or cashier’s checks), so there was no way to miss any of my payments at all – if a transfer was declined, we would be effectively disenrolled from all the programs and the old interest rates + fees would resume. As a result we very quickly repriotized things and got our crap together in a way that I don’t think we would have otherwise.

So, short answer, in our situation our particular service worked out ok. If it was just a single card that had a lot of debt, I might not recommend it, because there is a monthly charge and negotiating your way into a debt management plan for a single issuer won’t be nearly so onerous a task. For multiple cards it’s worth looking into, I think. Just watch for scams, I’d stick to non-profit agencies.

That’s the funny thing about high-interest, large debts, ed - it seems impossible to make any headway with it. We were in the same boat, and we have just done a re-finance on our mortgage to basically consolidate our high-interest debts into a low-interest mortgage*, and while we still have virtually the same amount of debt, it feels like we are finally on top of things and not frantically treading water any more. I can see why an orderly re-payment of debt schedule would also work.

My advice on debt-management companies would be the same as yours - go with a non-profit. Heck, you can even try using this as a bargaining chip with your credit cards, Brain - tell them that you are really struggling with their high interest, and if they don’t lower it (to, say, 5%), you will be forced to go into an orderly re-payment of debt schedule (they will know what that means). Nothing ventured, nothing gained. :slight_smile:

*Not something I’d recommend for everybody, but it seemed the best choice in our unique situation.

Another thing to be careful is sometimes a proposal to your creditors appears on your credit report the same way a bankruptcy would, so you are essentially given the same bad credit rating while making payments. They do not get love from many. Another critical view.

For what it’s worth, we did not suffer these adverse affects on our credit. I couldn’t tell you why or why not.

We tried doing that lastyear. Maybe we got a bad company, (DSA - Debt Settlement Agency). First, it took them 6 months to even start paying off the creditors. During that time, our monthly payments were used for their fee. Then we had to set up a savings account that wasn’t affiliated with our regular bank (one of our creditors), and put half the fee into it. Then as it grew interest, the creditors would be paid with the interest. It was supposed to take 3 years. We were getting as much as 30 calls a day from the creditors, and their lawyers. DSA said they would take care of any harrassment we received and promised we couldn’t be sued. Then we got served Halloween night.

My husband called a lawyer the nextday, and he recommended avoiding court and filing Chapter 7. The past 2 months have felt like winning the lottery! We get to keep the money we make. We can afford groceries, and the thought of the house or car needing repairs, or one of us getting sick, doesn’t send us into a panic. I wouldn’t recommend bankruptcy, but I’d sure recommend it before going with a debt settlement company.

Mr. SCL and I used a non-profit agency funded through United Way and they were great. We had to give up all credit cards. We paid them a fixed amount each month, with a $20 fee, and they distributed it to the creditors. It took several years, and if you miss a single payment you are disenrolled, but it worked for us. The best thing was that it stopped the harassing phone calls. Not having credit cards for several years also taught us to stop using them. We have one now, but we don’t use it.

What about SafeGuard? That’s the one for which I’ve seen the most TV ads lately.

I have only one maxed credit card, but I also have a student loan and a tax bill on which I’m making monthly payments to the IRS; it would be nice, if possible, to consolidate all three into one manageable monthly payment.

Awhile back, I considered using one of these places. Instead, I called the credit cards who were gouging me with high interest rates and fees. I told them to (1) cancel the card and (2) that I was hoping to avoid filing bankruptcy and would like to get the fees knocked off and the interest rate lower. With the threat me filing bankruptcy (and them never getting their money), almost all dropped their interest rates and voided the fees. This allowed me to pay down almost all of them, and pay off quite a few. My credit is no where near perfect, but at least I’m less in debt than I used to be.

Would bankruptcy still be an effective threat under the new law?

We used a nonprofit called Credit Counseling somethingorother about 10 years ago, mostly to get rid of a certain credit card company’s very nasty collections agents. Not that we weren’t in trouble – we were up to our necks in debt with that card, and the high-paying job that was supposed to be our salvation melted away rather suddenly. In a strange twist, all of our creditors except the nasty credit card company agreed to the arrangement. But one they learned we were doing the credit counseling thing, they suddenly agreed to a pennies-on-the-dollar settlement, with the proviso that we could never use their card again. The experience didn’t have much of an impact on our credit rating, as I recall. But we did have an “Oh, my God!” moment less than a year later when Nasty Credit Card Company started soliciting us again to use their card. We knew better.

Suze Orman sez:

A few years back I too turned to a debt counseling company. Profina, now known as InCharge, was the one I went to. And I loved it. They took my $1500 loan (among others) at 28% apr with a minimum payment of $120 a month and reduced it to $70 a month payment and an interest rate of 23%. It helped me A LOT and I have no complaints about them at all. Of course this was probably 5 years ago and before they changed their name so I don’t know how they are now…