Questions to Ask Before Hiring a Credit Counselor

The Federal Trade Commission has recently cracked down on shady debt-relief practices, but consumers still need to be their own advocate.

“There are debt settlement companies out there who are not ethical, they have no idea what they’re doing,” says John Ellis, a certified public accountant and president of the John Ellis Company.

If you are drowning in debt and have decided to seek assistance from a debt counseling agency, here are five questions you need to ask.

Are You in Good Standing? 

Before approaching a company, check out its status with regulators and agencies like the Better Business Bureau.

Michael Bovee, the founder and president of the Consumer Recovery Network, suggests only working with a company with a clean BBB record and at least three years of experience.

 “Consumers should look to speak with companies that are blunt and upfront about what it takes to be successful at settlement,” he says.

Also check to see if the company is part of a broader association that has certain requirements.

 “[It] shows that that company is interested in abiding by certain guidelines and associating with other companies that are like minded. [Consumers] might want to ask if the company is insured or bonded, ” says David Leuthold, executive director with the Association of Settlement Companies [TASC] .

How Long Will the Process Take?

Disclosing payback plan details and fees are now required by law, but you should still ask a debt settlement counselor for every detail of your repayment plan.

“A company should be able to provide you with a good faith estimate of the cost of the program (meaning the fees), the amounts that you need to settle, and how much is it going to cost to settle all of these debts over whatever period of time,” says Bovee.

Can I Get That in Writing?

“You should never engage in a service without a written contract or engagement letter,” says Ellis.

Seeing a plan on paper helps eliminate any misunderstandings and can potential bad practices. It also helps to make sure everyone is on the same page.

“Take the time and if you have something in writing [disclosures, estimates], where you can see the math in black and white, contemplate that and share it with your spouse,” he says. “It should be done voluntarily without having to coax it from a service provider.”

What are the Potential Tax Consequences of my Payback Plan?

If you settle your debts for less than the original amount (saving $600 or more), make sure you understand the tax consequences.

“If they don’t, they’re in violation of the new disclosure rules,” says Bovee. “If you’re going to save over $600, that’s going to be reported to the IRS. You’re going to get the 1099 fee for your 2010 tax year starting in January. You have to budget for that.”

Not all the experts agreed the tax advice should come from the debt counselor. Ellis suggests you seek professional tax assistance to ensure no problems with the taxman.

How Will You Contact my Creditors?

The experts say it is important to find out how and when a debt settlement company will speak with the creditors you have outstanding accounts. Depending on the company, this communication might be through a power of attorney letter or a cease communication letter.

“Most reputable debt settlement companies know that their success depends upon their relationship with the creditors,” says Leuthold. “Creditors normally don’t like any cease and desist letters.”

Make sure you understand the implications of a debt settlement company coming between you and your creditors.

“It interrupts the flow of communication between the creditor and consumer,” explains Bovee. “By sending a limited power of attorney letter, it blocks consumers from communicating with creditors and it leads to escalated collection actions.”