5 Don’ts of Debt Management

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BOSTON (TheStreet) -- Debt is daunting. Fortunately, there are many debt-management counselors there to help when you're in over your head.

Unfortunately, there are some debt-settlement companies out to fleece you. Over the past decade, the Federal Trade Commission and state enforcers have brought a combined 259 cases against so-called debt-relief providers that have deceived or otherwise abused clients who are already down on their luck. Here are five ways to avoid being a victim.

1. Don't choose a for-profit debt-management agency. There are many agencies dedicated to advising consumers on the art of debt management, including offering budgeting advice and, sometimes, negotiating lower interest rates and monthly payments with creditors. Find one that isn't solely out to take more of your money. Don't be afraid to ask whether a credit counselor will get a commission for signing you up for a debt-management plan. If the answer is yes, go elsewhere. "First and foremost you want to look for a nonprofit," says Ali Mahood, a financial-education consultant in Boston. "For-profit companies will charge high fees and they don't yet follow federal guidelines."

Two of the better-known nonprofit debt-management agencies in the United States are Money Management International and American Consumer Credit Counseling.

2. Don't immediately trust debt settlement agencies. One way of dealing with debt is to stop paying your credit-card bills to the point of charge-off, hoping creditors will say "enough already" and offer to settle the debt for less than you owe. Not-for-profit debt-management agencies don't generally deal with such tactics. But late-night television is full of debt-settlement agencies that offer to negotiate a deal for you, for a fee, promising they're out to get you the best settlement possible. Some may be just out to get you, period.

"There are a lot of shady players in this market," says Odysseas Papadimitriou, founder and chief executive officer of CardHub, an online resource for credit-card-related information.

Papadimitriou recommends avoiding firms that assure you the credit card company will offer a good settlement (since only the creditor can make such a guarantee) or promise the debt-settlement process won't affect your credit score. (It will, and you should ask up front how big a hit your credit will take.)

3. Don't hire a debt settler until Halloween, if you can help it. The Federal Trade Commission recently issued amendments to the Telemarketing Sales Rule especially designed to protect consumers from unsavory debt relief service agency tactics. Chief among the amendments is the Advanced Fee Ban, which prohibits debt-relief providers from charging upfront fees before providing services.

Under a new rule, the debt-settlement agencies will not be allowed to collect a fee unless the following requirements are met, according to an FTC advisory: "The debt-relief service successfully renegotiates, settles, reduces or otherwise changes the terms of at least one of the consumer's debts; there is a written settlement agreement, debt-management plan or other agreement between the consumer and the creditor, and the consumer has agreed to it; and the consumer has made at least one payment to the creditor as a result of the agreement negotiated by the debt-relief provider."

Why Halloween? Because the rule goes into effect Oct. 27.

4. Don't do business with debt settlers over the Web. Papadimitriou notes that there's a loophole in the new rule: Because it's part of the Telemarketing Sales Rule, it protects only those consumers who hire a debt-settlement agency over the phone -- calling an agency in response to an infomercial or late-night ad, for example. "If the transactions take place entirely online or in a face-to-face meeting, they won't be covered," he says.

5. That said, don't give out your banking information to collection agents over the phone. Whether it's about a credit card bill or medical bill, a call from a collection agent can be daunting. If you are dealing directly with your creditor, you shouldn't feel pressured by an agent who insists you provide banking information for an automatic payment.

"I've seen too many people have their checking accounts drained that way," Mahood says. "Offer to mail them a check."

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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