Credit Counselors' Crunch

Many people are learning the definition of fraud by participating in credit counseling repayment plans.  There are a number of problems with typical plans.  1) they apply only when a creditor voluntarily agrees to the program, 2) they do not usually apply to secured creditors, 3) many times the money either doesn't make it to the creditors, or when it does it is much less than the consumer expected, and 4) the program appears as a bad mark on your credit report.

Some of the abuses are listed here in this testimony before the FTC.

A while back I had a young couple come in my office with a history of dealing with a credit counseling program.  Basically their agreement was to pay the credit counselor three monthly payments of $1600 each.  After that the payments would drop to $700 monthly each for the remainder of the three years.  What they were supposed to do is take the extra $900 monthly that they were no longer paying the credit counselor ($1600 minus $700 equals $900), and deposit it in a bank account for those three years.  By this point they would be three years behind on their creditors, and have a bad history - so bad that the creditors would be worried they would not get paid.  They would then take the saved money and offer pennies on the dollar to settle the credit accounts.

Let me point out the predatory practices involved here.  The credit counselor was taking three years worth of income - $27,900 (3 times $1600 plus 33 times $700), and really offering nothing in return but a simple "idea."  If the consumer could find the self-discipline to put 33 months of payments into the savings account, their credit is still ruined.  By three years, one of the creditors would surely have filed suit.