Like many Americans, Judy Orlando, a nurse in LeRoy, N.Y., had racked up a mountain of credit card debt. Divorced and raising five children, she was carrying a total balance of about $30,000 on her five credit cards.
In 2006, she was contacted by Nationwide Asset Services, a debt settlement company based in Phoenix.
“They told me I’d be debt free in 18 to 24 months and my credit would be better than it was before I got into the program,” Orlando, 52, recalls.
Orlando agreed to pay a $1,300 enrollment fee and send the company $350 a month. They told her to stop paying her credit card bills, cut off all contact with her credit card companies and to change her phone number, which she did.
Orlando figures she paid Nationwide Asset Services about $10,000 (plus enrollment fee) during her two-and-a-half years as a client. In that time, she says, the company lowered her $30,000 balance by less than $3,000. "They don't tell you the interest and late charges keep compounding,"she says.
Since they weren’t getting paid, the credit card companies placed liens on her home. Fearing she had no other option, Orlando contacted a lawyer and is seeking bankruptcy protection.
Last month, New York State Attorney General Andrew Cuomo sued Nationwide Asset Services for false advertising and fraudulent business practices. According to the lawsuit, only one-third of 1 percent of the company’s customers got the promised 25 to 40 percent debt reduction.
“People think they’re reaching out for a helping hand, and it turns out to be a hand that pushes them further under,” Cuomo said at a news conference.
Nationwide Asset Services released this statement: "Right now our local attorney is currently reviewing a copy of the complaint and at this time we can not comment on the allegations contained in it."
Show me the money
Debt settlement companies are a risky way to go because they almost always require a sizeable payment upfront. Most promise a money-back guarantee, but getting a refund can be difficult, if not impossible.
Most importantly, they do what you can do on your own – contact your creditors to see if they will lower your interest rate or make some other money-saving concession.
Not all debt settlement companies are crooks, but clearly there are many bad apples in this barrel. Washington State Attorney General Rob McKenna has sued several debt relief companies.
“They claim to have special relationships with the credit card companies or to know ‘secrets’ about how to reduce the amount you owe,” McKenna says. “But they consistently fail to deliver on those promises.”
Cuomo has started a nationwide investigation into what he calls a “rogue industry … offering consumers false hope, charging tremendous fees, and leaving them in a worse financial situation.”
Cuomo recently subpoenaed information from 15 companies that do this work to find out if they are really helping people.
You can do it yourself
“Why pay for something you can do for free?” asks Gail Cunningham, vice president for public relations at the National Foundation for Credit Counseling. “Creditors have told me repeatedly that they do not offer any deeper concessions to the consumer who works through a debt settlement company vs. a consumer who comes to them directly,” she says.
If you pay your bills on time and have a good credit rating, see what you can do on your own. You probably have more bargaining power than you imagine.
“Each lender has its own policy, but there’s clearly a greater willingness on the part of credit card companies to be more flexible with consumers than ever before,” says Adam Levin, chairman and founder of credit.com.
Call the credit card company and ask to speak to the customer retention department. “That’s where the final decision is going to be made,” according to Andrea Rock, senior editor at Consumer Reports. “If you’re a good customer with a good credit rating, they would rather give you a little interest rate break than spend the money to replace you.”
To find out what the current interest rates are for your credit score, go to cardtrack.com. Right now, the average credit card interest rate for someone in the top credit score bracket (760 and up) is 7.4 percent.
If your credit picture is not so good – you have significant debt on a number of cards, are missing payments or only making the minimum – then it’s time to meet with a credit counselor. You want a true, not-for-profit counseling service.
Credit counseling works
Laurie Ferrer, a 42-year old nurse in St. Louis, Mo., remembers what it was like to be drowning in debt.
“I wasn’t sleeping at night,” she says. “We didn’t celebrate Christmas in 2006 because there was no money for food, let alone gifts.”
When Ferrer’s husband was laid off, the family started living off their credit cards. They had 29 of them, all maxed out. The total outstanding balance was a staggering $41,000.
“We were so much in debt that we weren’t even making it paycheck to paycheck,” she tells me. “There wasn’t enough to even make the minimum payments.”
Because of those missed payments, the interest rates on those cards skyrocketed, in some cases as high as 32 percent.
The Ferrers were lucky. They found Clearpoint Financial Solutions, a reputable, non-profit counseling agency. During the free consultation they were given a game plan. They’d have to set up a budget, stop using credit cards, pay for everything with cash and start saving a little each month.
“That was the first night I was able to sleep all night,” Laurie tells me.
Clearpoint was able to negotiate much lower interest rates on those cards. The Ferrer’s total monthly payment went from $4,000 to just $1,200. Clearpoint charges them $25 a month. That fee is waived for people who cannot afford it. In six months, that $41,000 balance has been whittled down to $29,000.
“Within a couple of years from now, I should be completely credit card debt free and this will never happen to me again,” Laurie proclaims. “It’s a beautiful feeling. I’m doing it. I’m going to get there and it’s not going to take me 25 years!”