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Your legal rights: Beware of debt assistance scams

From the office of Attorney General Lori Swanson

Do not pay up-front fees for debt assistance.

As of October 27, new federal rules went into effect that 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.

In these tough economic times, 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. As a result of the bad economy, 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, 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 10 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 at:

Department of Commerce

Market Assurance Division

85 E Seventh Place, Ste 500

St. Paul, MN 55101

(651) 296-2488