Katie Porter at Credit Slips writes about a potential pitfall of the credit counseling requirement imposed under BAPCPA.† While many credit counselors are consumer oriented, there are those who push plans funded by the credit card industry.† That became clear when Professor Porter reviewed a plan prpared by an agency described by a consumer debtor as a “credit counselor.”† The plan was, in fact, what the Federal Trade Commission describes as a “debt negotiation program.”† Here’s how it works:
The company estimates that it can settle the single credit card debt at issue here for 40% ($13,420) of the actual debt. For the privilege of paying this partial amount, the consumer is required to pay the agency $5,032.68. Indeed, the first 3 payments that the consumer makes, totaling $1,405.16, go straight to the agency and do nothing to pay down the debt. Even when some money starts being set aside for the real creditor, the agency keeps 47% of the first 20 monthly payments of $380 each.
The promise is that the company’s team of “certified” debt arbitrators will negotiate for you to pay off a debt for less than the full amount owed. The FTC warns that these arrangements can be “very risky,” cautioning that there is no guarantee that the creditor will accept the partial payment offered by the debt negotiation program and that while you are paying the debt negotiator (and not your credit card company) that the interest and fees on your credit card will continue to climb. Indeed, from this disclosure, I can’t tell when a consumer can be assured that the debt settlement amount is fixed. But I’m guessing that if the “settlement” falls through the company keeps its $5,000 fee.
Read the post, and the comments, which note an additional problem with debt negotiation programs–while you make the paymernts and wait to see if the settlement is accepted, your credit goes in the toilet, and due to the ubiquitous universal default clauses in most credit card agreements, your relationship with other creditors sours as well.† Anecdotal evidence from my own practice suggests that it is very difficult to recover funds paid into such programs, even if no settlement is reached.† And, in some cases, it is difficult to determine that any effort was made to settle the accounts at all.
Critical analysis of such plans is crucial, and it is important to understand how much you are paying and for what.† I occasionally handle such negotiations for clients myself, and attorney fees would not approach the amounts charged by such programs.† And your attorney will also be able to recommend a consumer-focused credit counseling agency, as well.