Debt Settlement Scams, Legit Credit Counseling, and Repayment Plans

The Carters, a couple drowning in credit card debt to the tune of $25,000, were desperate. They didn’t want to declare bankruptcy, and instead sought debt settlement services from a "credit specialist"—Credit Solutions on America—according to the recent NY Times article.

Mrs. Carter says they ended up paying $3,825 over a period of two and a half years, with absolutely nothing to show for it. In fact, their situation has gotten much worse: One of their credit card balances has grown from $8,000 to $18,000 due to interest and fees alone.

Stories like this, of people who are trying desperately to remain solvent and avoid bankruptcy and subsequent ruined credit scores, make you wonder if there is a more legitimate option out there beyond just a debt collection scam. 

Non-profit credit counseling

Non-profit debt counseling and settlement companies came to be in the 1960s, and were originally funded by the credit card companies themselves. These non-profits operate by negotiating with the credit card companies to lower interest rates, waive fees, or reduce your debt altogether - all without asking for hefty upfront fees. Over time, though, creditors slowly stopped making as many concessions to debt-strapped consumers, and these "non-profits" lost much of their effectiveness.

But last week, the National Foundation for Credit Counseling—the umbrella organization for legitimate debt counseling and settlement companies—received some good news: 10 top card issuers (including Bank of America, Capital One, Chase, Discover and American Express) will be taking steps to offer additional concessions to consumers. These concessions may be in part due to increased pressure from the White House on creditors to stop "deceptive practices" such as hiking interest rates or cutting limits willy-nilly. More likely though, credit card companies are just wondering what other choice they have when it comes to consumers defaulting on their debts. Better to get some portion of the debt returned than nothing at all. 

Getting on a repayment plan

A settlement company or counselor will often try to negotiate a repayment plan with your creditors on your behalf. Repayment plans allow you to slowly pay back all of your debt, often at a reduced interest rate and without additional late charges piling up. Enrolling in a repayment plan won’t harm your credit score, since you are still taking responsibility for your debts and are actively working to pay them off. To qualify for a repayment plan, you must agree stop using your credit cards cold turkey.

A repayment plan makes sense, but lately, fewer and fewer people can afford them. Only 25% of those applying for repayment plans have enough income to make the required minimum monthly payments, according to Jim Godfrey, president of the Consumer Credit Counseling Service of Maryland and Delaware.

The average consumer seeking debt settlement services holds $24,000 in unsecured credit card debt, and earns $39,000 a year in household income. Sally Parker, the National Foundation for Credit Counseling vice-president, says that based on these numbers, a repayment plan would typically require the consumer to pay $540/month for five years (without using credit cards for a single additional purchase). Recent concessions by the credit card companies might result in reducing that monthly payment by $120, equaling a monthly payment of $420 for five years.

Note that each case is unique, and there are no across-the-board standards that credit card companies have to agree to when it comes to settling debts. They may be more lenient with one consumer than another. But for those who have more debt than they know how to pay off, it’s worth a try.