3 Biggest Warning Signs of a Bad Debt Relief Company

I was driving into work today and heard a radio advertisement that upset me and reinforced in my mind the reason I wrote my book. That ad from a debt relief company claimed that the new credit card legislation required lenders to reduce your credit card debt to 50% of what you currently owed.

While the new legislation does prevent some of the more unfair practices in credit card companies' policies, nothing in the legislation will force credit card companies to reduce what we owe them. The Bucks blog on the NY Times has an excellent break-down on what the new legislation actually says.

The advertisement reinforced the dangers that we may face when we hire a debt relief agency to help us with our debts. If they are offering false promises trying to get our business, are they really going to follow through on their promises when they have our business?

As emphasized in The Road Out of Debt, you have to protect yourself when entering to a relationship with a credit counselor or debt relief company. The 3 most important things to watch for are:

1. Did they take the time to understand your financial situation?

A financial counselor needs to understand your entire financial picture so he or she can give you advice on what you can afford going forward. The counselor must take at least an hour to give you advice that will work for your unique situation. If all that counselor does is to take twenty minutes to get the names and addresses of your creditors and immediately seeks to put you into a payment plan, he or she is more likely concerned about their commissions or profits rather than your financial well being.

2. Do you pay a reasonable upfront fee?

You should only have to pay between $40-80 for the initial consultation and $25-50 dollars for a monthly fee. Big upfront or monthly fees and requests for donations or tips are sure signs that taking money from you is their primary goal. Take your business elsewhere if the fees are large no matter what decrease in your payments and balances you are offered.

3. Are payments being made to your creditors as promised?

Most importantly, follow up with your creditors to make sure that your creditors are being paid as promised. If they are not receiving payments, you will have bigger problems down the road and are throwing away money to the debt relief company. Stop all payments to the debt relief company and contact you state's attorney general.

Always keep watchful eyes on anyone handling your money. If the company you hire fails any of the 3 items on the watch list, get away from them immediately.

In addition, keep in mind, each payment you make pays the counselors as well as your debts. This is additional money that you could be using to pay your creditors. Before thinking someone else can do it for you, perhaps you should try to handle them yourself. You then won't have worry whether your debt relief company is doing what it should be doing and you may save yourself some money.

Read more articles about consumer debt by Ted Connolly, co-author of The Road Out of Debt