Considering Debt Consolidation? BEWARE!

You could be in debt 3 to 5 years LONGER if you go to the wrong debt consolidation company. On ABC NEWS, I answered the following questions from viewers, so it's wise to review these before you choose a firm!

Q. I’m at the point where I have $20,000 in consumer debt and I know I need to do something about it. I’ve been looking around for a company that will help me, but I want to know what red flags I should look for so that I can find one that is legitimate.

Drowning in Debt in Durango

ELLIE: Well there are quite a few red flags to look for. Stay away from them if they:
• Guarantee they can remove unsecured debt,
• Promise debts can be paid off at pennies on the dollar,
• Require substantial monthly service fees,
• Demand a percentage of your savings as payment,
• Advise you to stop making payments to your creditors,
• Say that creditors never sue consumers for non payment
• Promise that their system won’t hurt your credit record.

Q. We went to a debt relief company for an initial meeting and we’re not sure if we should go with them. They don’t charge an upfront fee, instead they charge a percentage of the amount they will save us. But we’re still going to have to pay. Is this good?

Samantha and Tommy from Riverside, CA via facebook

Ellie: In the past, it wasn’t necessarily good, because there wasn’t a regulation about what they claim they’ll save you and many companies inflated their estimates to get even more money from consumers than if they charged an up front fee. It was still a fee, but it was wrapped up in prettier paper so that the consumer thought they were better off. But there’s good news, under the new FTC rule, if the company bases its fees on a percentage of the amount it estimates you’ll save, it must also provide both the percentage and the estimated dollar amount that represents in writing.

Q. We are talking to a debt consolidation company and it’s all so confusing. We want to save money on our overall credit card bills, which cost us about $800 a month. But the company is telling us to make payments and save up—how much are we suppose to save?

Alton and Sharon from Oxford, NY via online contact form

ELLIE: Before the FTC rule, you didn’t really have a way of knowing but now you do. These companies usually ask you to make payments to a dedicated account. When a certain amount has been saved, they’ll go to your creditors and offer to pay off a percentage of the debt. You should ask the company: “How much will I need to save?” The new rule requires debt settlement firms to provide a reasonable estimate of the amount you’ll need to save before they’ll make an offer.

Q: When my brother and his wife set up a debt consolidation, they had him set up a fund that he made payments to. It turns out that the place that held the money was also in partnership with the debt company and he wasn’t allowed access to the money. Is this the way it is suppose to be done?

Audrey submitted via Online Contact Form

Ellie: No, it’s not suppose to be that way and under the new FTC rules this kind of holding or savings account will have closer regulation. The FTC now requires that the customer have full access to the funds, they must be held at a financial institution not associated with the debt consolidation firm and the customer would have the right to withdraw the money at any time.

Q. I was thinking of calling my creditors myself but my friends say I should let the debt consolidation company call them. Who is right?

Moriah Stephens from Allentown, PA

Ellie: In this case, I think you are the one on the right track. You should try to call your creditors yourself before hiring a debt settlement firm. You can sometimes develop your own workout plan because it is in the creditor’s best interest to help consumers pay off their bill.

Q. Where can I find a legitimate non-profit debt consolidation company?

Mike from Mechanicsville, VA via Ellie Kay’s blog

Ellie: The National Consumer Credit Counseling service is a non-profit organization that has thousands of partners across the county. Go to Nfcc.org to find an office near you.

Ellie Kay

America's Family Financial Expert (R)