The Downsides of Debt Relief

Friday, Feb 22, 2008

LITTLE ROCK – Consumer debt has increased at a staggering pace in recent years. In 2007, the number of Americans filing for bankruptcy jumped by 40 percent, with more than 800,000 individuals seeking relief through bankruptcy last year alone. As debt continues to burden more and more Americans, debt relief services seem more and more attractive to consumers looking to regain some financial security. However, many of these companies simply make promises that they cannot keep, costing consumers more money up front without any savings in the long-run. Thus, Attorney General Dustin McDaniel issued this consumer alert to caution Arkansans about debt relief companies.

"Debt can sometimes be overwhelming," said McDaniel, "and unfortunately, companies often advertise quick financial fixes, preying on good people's bad fortune. The truth is there are no quick fixes, and bankruptcy should be the absolute last resort."

Some companies that offer debt relief do not advertise the solution as bankruptcy, even though that is often what they recommend. Consumers are sometimes advised to stop paying their creditors and let the debt relief company negotiate with creditors directly, which just makes matters worse. Other services ask consumers for money up-front, not telling the consumer that the payment is for a fee rather than a payment towards the debt. Still some companies promise to negotiate a one-time settlement with creditors, which they claim can reduce principal payments by 50 to 70 percent. This claim is rarely realized. In fact, over the last few years, the Federal Trade Commission has sued more than a dozen debt relief companies that simply lie to consumers.

If you are burdened by debt, here are some tips to remember:

- Talk to your creditors directly. Often times they will lower your interest rate upon request and some may be willing to work out a modified payment plan.

- Do your homework. Bills can be overwhelming, but you should not make financial decisions based on radio ads or TV commercials alone. Shop around for companies or credit counselors that will work with you to understand your individual financial situation and offer tailored solutions.

- Find out what fees are involved. According to the Consumer Federation of America, a consumer should not pay more than $50 for a set-up fee and no more than a $25 monthly maintenance charge. If your counselor or company seems vague about the fee schedule or reluctant to put it in writing, shop elsewhere.