Till Debt Do Us Part
Till Debt Do Us Part
Chris Johnson, 39, knew she needed help when her credit card debt topped $15,000. Even working two jobs -- full-time at a university childcare center and part-time at a library -- she couldn't keep up with the minimum payments. Late charges and over-the-limit fees were adding nearly $400 a month to her debt, and her interest rates had climbed as high as 31 percent. "It became this cycle and I couldn't get out of it," says Johnson, who lives in Fort Collins, Colorado. "The anxiety was horrific."
Johnson racked up the debt after she went back to school to get her degree in human development and family studies eight years ago. Although she also worked two jobs then, the pay was low, so she used credit cards to make ends meet. "I thought if I just worked hard I didn't need to worry about a budget," she says. "It was sloppy thinking combined with desperation that got me in trouble."
In 2006 Johnson made an appointment with Consumer Credit Counseling Service (CCCS) of Northern Colorado and Southeast Wyoming. Counselors there helped her learn how to manage her money. They also set her up with a debt-management plan (DMP), collecting one monthly payment from her and distributing it to her creditors. After she established a record of paying on time, her credit card companies agreed to reduce her interest rates and waive her fees for being late and over the limit. Today she's paid off more than one-third of her total debt and is on track to pay off every penny in less than five years.
Yet for every success story like Johnson's there's a family who got scammed by an unscrupulous company. According to an investigation by the IRS, "many credit-counseling organizations operating as tax-exempt charities are now primarily sellers of debt-reduction plans, motivated by profit, and offering little or no counseling or education." After auditing more than 40 such organizations, the IRS revoked or terminated the tax-exempt status of every last company investigated. Hundreds more, many of them legitimate, have not been audited.
There really is life after debt, as Johnson learned, but you have to be smart to get there. Read this before you sign up with any organization or company that promises to help you reduce your debts or clean up your credit history.Credit Counseling
The Claim: A trained credit counselor will teach you how to budget, manage your money, and map out a reasonable plan for paying off your debt.
The Truth: A reputable nonprofit credit-counseling organization, such as the one Johnson used, can help you get back on track financially through education and counseling. For-profit outfits, on the other hand, are probably more interested in selling you services. The Department of Justice's U.S. Trustee Program, which oversees bankruptcy filings, maintains a list of government-approved organizations. To find one in your area, check the list online at www.usdoj.gov/ust or contact the bankruptcy clerk in your district.
The Cost: Fees vary depending on the extent of services and where you're located; pre-bankruptcy counseling typically costs about $50. Any fees should be fully disclosed up front and may be based on your income. The nonprofit credit-counseling organizations on the U.S. trustee's list must waive the fee if you are unable to pay.
Caution: Be sure to inquire into what type of training counselors receive and if they are accredited or certified by an outside organization.Debt-Management Plan
The Claim: The plan will help you get on top of your debt by reducing your interest rates and waiving any fees you've accrued. You should be able to pay off your balance in five years or less.
The Truth: "A DMP can help you if you have the ability to repay your debt," says Sara Allen Gilbert, executive director of the nonprofit CCCS of Northern Colorado and Southeast Wyoming, "but just can't catch up because of late charges and fees." Instead of paying your credit card companies directly, you make monthly payments to a third party, such as a credit-counseling organization, which then distributes the money among your creditors and negotiates with them on your behalf. After three months of on-time payments, your credit card companies may agree to lower interest rates and waive fees, essentially making your account current again. "These programs don't make sense for everyone," Allen Gilbert cautions. If your debt is too high to pay off within five years -- the standard, industry-wide goal -- or you simply can't afford to make DMP payments, a reputable organization will discuss other options with you, such as consulting with a bankruptcy attorney.
The Cost: You'll pay a monthly fee to the organization that administers your DMP. The fee may depend on several factors, such as the laws of the state where you live, the number of creditors who must be paid each month, and your income. At CCCS of Northern Colorado and Southeast Wyoming, for example, the monthly fee is $6 per creditor, with a maximum of $50. Low-income clients pay as little as $10 or $20 per month.
Caution: Once payments begin, monitor your statements closely and stay in touch with your creditors to be sure the program is working as promised. If the organization doesn't make your payments on time, you will fall further behind and your creditors won't waive your fees a second time.