If you are ducking debt collectors and using one credit card to pay off the next, you may be considering turning to a debt assistance company for help. There are hundreds of these companies on the Internet and in the business pages of the phone book. They all promise the same things: to reduce your overall debts, work with your creditors to slash the interest you are paying and help you create a personalized debt management plan that will keep you debt-free permanently.
Can they make good on what they say they can do?
The answer is yes, if you’ve gotten to the point where you owe thousands of dollars in unsecured debt -- that is, debt that is not secured by an asset, such as a house. But it still takes hard work and commitment from you to get back on track.
Here’s what to expect from a reputable debt assistance company:
- one-on-one credit counseling and advice on managing your debts and help with creating a budget.
- enrollment in a debt management plan that is approved by your creditors, if the measures above are insufficient to help you. Together, you and your counselor will figure out how much money you can afford to put toward retiring your debt every month. You then deposit that sum with the debt assistance company every month. It divvies up the money among your creditors and sends them the appropriate payments by the due date.
Once enrolled in a debt management plan, you may pay far less interest on your debts than previously. Creditors may even be willing to waive late fees, because they work closely with reputable debt assistance companies. They are willing to negotiate terms of debt in return for the certainty of receiving monthly payments on time.
Typically, people who are in a debt management plan need three to six years to finish paying off their debts. During that time, a good debt assistance company offers free, ongoing budget counseling plus classes and educational materials about managing debt. Participants may be restricted from applying for new credit while fulfilling the plan.
However, as you repay your debts, your credit report will improve and you may be able to qualify for new credit sooner than the seven to 10 years you will wait if you declare bankruptcy.
Not all credit assistance companies are reputable
Some take advantage of people who are desperate for help, taking monthly payments but never paying back creditors. Here are two warning signs that the debt assistance company you are dealing with is unscrupulous:
- promises to clean up your credit report. This is illegal -- late or skipped payments stay on your credit report for up to seven years. Only time and a steady pattern of repayment can improve your credit rating.
- huge monthly service fees or demands for a portion of your savings. Nonprofit debt assistance companies help for a minimal fee or for free, because they’re paid by the creditors who approve your debt management plan. Many also receive grants from government, private-sector and nonprofit organizations, and help pay their costs through fund-raising activities.
Finding a good debt assistance companyBefore you sign on with a debt assistance company, check it out with your state Attorney General and local consumer protection agency and Better Business Bureau.
Make sure it’s a non-profit firm that belongs to the Association of Independent Consumer Credit Counseling Agencies, the National Foundation for Credit Counseling (NFCC) or the American Association of Debt Management Organizations. NFCC members can use the name Consumer Credit Counseling Service (CCCS) or other names, but hold the NFCC member seal.
Avoid any company that promises to repair your credit problems in a hurry. The road to financial stability typically requires ongoing counseling and can take years.
Getting started with debt assistanceOnce you’ve found a good debt assistance company, continue to pay your bills until your creditors approve the debt management plan. Then, before you start making payments, contact your creditors to confirm that they have accepted the proposed plan. Continue contacting them and reviewing your monthly statements to make sure they get paid on time by the debt assistance company, and that you are receiving the benefits promised in your debt management plan, such as a lower interest rate.