Spot credit counseling scams

The bankruptcy laws that were changed in late 2005 now require credit counseling before you can file. The idea, of course, is to make it tough enough to file bankruptcy that most people won’t, that consumers will instead be able to use a debt-management plan to climb up out of a financial hole. The dilemma is how to know whether the credit counseling company is a good one — or is perpetuating a scam and just taking your money.

The Internal Revenue Service has revoked the tax-exempt status of dozens of credit counseling services after looking at whether the companies were truly acting as middlemen between the debtor and the credit-card company, or if they were more interested in making a profit by charging high fees.

Decide first whether you really need to file bankruptcy. It could be that you just need some counseling and information to help you get back on the right track.

Here are some things to look for if you do seek credit or bankruptcy counseling:

•The credit counseling company must be nonprofit. Where does it get its funding?

•Look for longevity in the company. How long has it been in business? Too often a shady company will simply change names.

•Has your state’s Attorney General filed a complaint against the company?

•How many complaints have been filed with the Better Business Bureau?

•The credit-counseling company’s initial fee should be minimal if you just need help with setting up a budget. If that’s not enough and you do need a debt consolidation plan, a fee of $50 a month is reasonable.

•Does the company insist you sign up for a consolidation plan when all you really need is a budget consultation?

•Does the company take enough time to assess your situation and advise you? If it doesn’t require at least an hour, you’re being hustled.

•Will you get a written plan?

In many areas of the country, the local United Way funds free nonprofit credit counseling services. Also take a look at “Credit Repair Kit for Dummies” by Stephen R. Bucci. The book could keep you out of the clutches of a credit counseling company, as well as help you avoid the long-term effects of bankruptcy.