Minnesota Attorney General's Office
1400 Bremer Tower
445 Minnesota Street
St. Paul, MN 55101
M - F 8 am - 5 pm
Debt Assistance Scams
Do Not Pay Up-Front Fees For Debt Assistance!
Federal rules ban debt assistance companies nationwide from collecting up-front fees before they deliver a service. Before a debt assistance company can collect a fee, it must have resolved at least one of the consumer’s debts, have a written contract with the consumer, and the consumer must already have made at least one payment to the creditor. Non-profit agencies and some attorneys, such as those that meet face-to face with their clients, may not be covered by the rule, so make sure that you closely read any written contract before you agree to purchase services from a given debt assistance company. Under the new rules, debt assistance companies must also tell the truth about how long their program will take to resolve a consumer’s debts, how much it will cost, and that failing to pay your creditors may damage your credit rating and lead to legal action against you.
Many consumers are struggling with high debt. Some people are forced to use credit cards just to pay basic living expenses like groceries and health care bills. Consumers are facing record-high levels of debt, and many people are falling behind on their bills. If you’re struggling to make ends meet, there are nonprofit credit counseling organizations that can assist you for free in managing your debt and coming up with solutions to your financial problems. You should be careful, however, to avoid hiring companies that charge you money to help you but end up making a bad situation worse. There are no easy ways or quick fixes for getting out of debt. Doing so requires developing a careful budget and may take time. Attorney General Lori Swanson offers these tips so that consumers trying to do the right thing by getting help do not get bad and costly advice.
Credit Counseling. Reputable credit counseling organizations help you develop a monthly budget and give you advice on managing your money and paying your debts. Many are nonprofits that do not charge you a fee for their services. Their counselors have training in the areas of finance and consumer credit. They will review your financial situation and help you develop a plan tailored to your needs. To locate a reputable credit counseling organization in your area, contact the following organizations:
LSS Financial Counseling Service
(metro area) 1-800-777-7419
(greater MN) 1-888-577-2227
National Foundation for Credit Counseling
You should make sure that any credit counseling organization that promotes itself as a “nonprofit” does not charge you hidden fees.
Bogus Promises of Credit Card Help. Many citizens are struggling to pay their credit card bills. In 2009, credit card delinquencies climbed to record high levels. In 2008, the average outstanding credit card debt for households with at least one credit card was $10,679. Just ten credit card companies control nearly 90 percent of the credit card market. Credit card companies often seem to raise interest rates for any reason or no reason at all, and it’s not unusual for credit card interest rates to reach nearly 30 percent. At the same time, credit card companies collected $18 billion in penalty fees in 2008 from consumers who paid their bills even a day late, exceeded their credit limit by even a small amount, etc.
There are many fraudulent companies seeking to exploit the fact that many consumers are having a difficult time with credit card bills. These companies make unsolicited phone calls to consumers promising to help lower their interest rates or find them better deals. The companies often require the consumer to pay high up-front fees of as much as $2,000 or more. Once the consumer pays the money, however, the companies often fail to deliver the promised services. The end result: the consumer now is $2,000 more in the hole. Remember: there is no easy way to lower your interest rates or get out of debt. Beware of companies that call you up and promise they have “insider secrets” on how to lower your credit card interest rates.
Debt Management Plans. If you owe more on your bills than you can afford to pay, a credit counseling agency may recommend that you establish a “debt management plan.” A debt management plan should be tailored to your particular financial situation. Under a debt management plan, you deposit money each month with the credit counseling organization, which may work with your creditors to lower your interest rate or waive certain fees. The credit counseling organization then uses your deposits to pay your bills, which may include credit card bills, car loans, medical expenses and the like. The credit counseling organization should work with you and your creditors to establish a payment schedule. The goal of a debt management plan is to repay the money that you owe through periodic payments. Most debt management companies are required to be licensed by the Minnesota Department of Commerce. Therefore, before you hire a debt management company, check with the State Commerce Department to be sure it is properly licensed and has not had any enforcement action taken against it. You may contact the State Commerce Department as follows:
Minnesota Department of Commerce
Market Assurance Division
85 East Seventh Place, Suite 500
Saint Paul, MN 55101
Debt Settlement/Negotiation Companies. Debt settlement/negotiation companies promise you quick results to get out of debt. They typically tell you to stop paying your bills altogether and instead save the monthly payments you are making in a savings account. Once you have sufficient funds, the company will supposedly contact your creditors to negotiate a lump-sum payoff of your debt. Debt settlement/negotiation companies often promise you that they can cut your bills in half or more. Debt settlement companies were largely unregulated until the Legislature passed a new bill in 2009 supported by the Attorney General’s Office that brings such companies under a regulatory framework. Under the new law, which went into effect on August 1, 2009, debt settlement companies must register with the Department of Commerce.
Under the new law debt settlers are prohibited from:
“Mary” is a divorced mother in her 50s with two children. With a reduction in her hours at work, she got behind on her bills. Mary thought she was doing the right thing by hiring a debt settlement company, which promised to reduce her bills and help her get out of debt. The debt settlement company required Mary to pay it hundreds of dollars in fees up-front. It then told her to stop paying her bills so that her creditors would be willing to negotiate with the company. A few months later, Mary was shocked when one of her creditors filed a lawsuit against her. She called the debt settlement company, but it told her that it could not help her with the lawsuit and that she would have to hire an attorney. Meanwhile, Mary’s credit was further ruined, and she was faced with defending a lawsuit in court. Don’t let what happened to Mary happen to you!
You should be extremely cautious about using a debt settlement/negotiation company. If you follow advice to stop paying your bills, your credit will suffer. Because you are not paying your bills, you may be contacted by debt collection agencies or even sued.
Most debt settlement/negotiation companies charge high fees, and in some cases take a high percentage of all monthly payments you deposit into your bank account.
Debt settlement/negotiation programs are very risky and have long-term negative impact on your credit and ability to get loans or credit in the future.
Some organizations, such as the Consumer Federation of America, warn consumers not to use debt settlement/negotiation companies. Consumers have told the Attorney General’s Office that debt settlement/negotiation companies have made serious misrepresentations to them that left the consumers far worse off than when they started.
If you follow the advice of a debt settlement/ negotiation company to stop paying your bills, you will likely incur late fees, pay interest-upon-interest, and fall further into default. This may ruin your credit, and some of your creditors may even file lawsuits against you or garnish your wages and/or bank account.
Tips for Consumers. Minnesota Attorney General Lori Swanson provides the following ten tips:
Better Business Bureau
220 South River Ridge Circle
Burnsville, MN 55337
Try to find an organization that will help you for free as part of its mission.
For more information, contact:
Office of Minnesota Attorney General Lori Swanson
1400 Bremer Tower
445 Minnesota Street
St. Paul, MN 55101
TTY: (651) 297-7206