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Bankruptcy and Credit Repair: Avoid the Scams and Get the Help You Need

Nov. 5, 2012
Credit Cards
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You didn’t see it coming. You were laid off, you had an accident, your salary took a hit, or you recently divorced the breadwinner of your family. Whatever it is, the unexpected can do a number on your personal finances, wreck havoc on your budget, and sometimes leave you with bad credit or even bankruptcy.

When you’re in a financial crisis, look for a helping hand. Beware of false friends, though. Some credit-repair clinics prey on the vulnerable and offer them fraudulent services—consumer desperation is their bread and butter.

If you’re looking for help from a credit-repair clinic, then do the research. There’s, of course, Google. You can also consult the Better Business Bureau, which publishes reviews of businesses free of charge. And know your rights, so you don’t get caught up in any scams.

The general rule of thumb: “If it sounds too good to be true, it normally is,” said Howard Dvorkin, CPA and founder of Consolidated Credit, a credit counseling service. Dvorkin is a seasoned negotiator, having spent two decades as an intermediary between debtors and their lenders. His company analyzes customers’ budgets, calculates what their clients can reasonably pay, and negotiates with lenders, therefore reducing payments by as much as thirty to fifty percent.

This process can last months and often years. “People have to realize that they didn’t get into debt overnight,” Dvorkin said. “It took them time to get into debt. And it will take them time to get out of debt.”

As you look out for scams, avoid companies that claim they can reduce your debt or repair your credit immediately. These companies tend to operate in areas with large pools of debtors, namely in Texas, California, and Florida—all states with looser regulations than most.

Below, you’ll find a list of helping hands you can trust—as well as some you can’t. First, the rogues’ gallery:

  • Advance-fee loans: Fraudulent credit-repair groups might promise a loan and ask for a fee up front. This should a raise a red flag, because companies can’t charge a fee until they’ve settled or reduced your debt. Also look out for language like “voluntary” contributions—they’re simply fees.
  • A “new credit report”: If a company claims they can erase your credit history, they’re lying.
  • A “new government program”: if a credit-repair agency claims affiliation with the federal or local government, then you should inquire exactly how they’re affiliated. Vague language like “new government program” should tip you off.
  • Fake credit cards: Some cards purport to offer a line of credit when, in reality, they don’t at all. The truth is tucked away in the disclosures.
  • Prepaid debit cards: They do nothing to boost your score, despite what some may claim.

Don’t be taken in by these false promises. Rather, talk to your lender. Yes, the people to whom you’re indebted can help. You simply have to act sensibly when you do. “Avoid the drama,” Dvorkin said. “No reason to start screaming, no reason to yell, ‘cause they don’t care”—lenders only want their money back, and the cause of your misfortunes isn’t their concern.

When you negotiate payments with your lender, be honest. “Don’t make a promise you don’t intend to or can’t keep,” Dvorkin said. State what you can afford, pay that amount, be consistent, read every bill, and, eventually, put the past behind you.

Need more tips?  Look below. The following friends can help:

  • A budget: A simple yet essential step to getting your financial ducks in a row.
  • A rainy day fund: A rainy day fund is your emergency cash reserve, one that can help keep you afloat if you have an unexpected drop in income or increase in expenses.  The hard part is calculating how much you’ll need, but, generally, we advise that you save between three months and one year of your basic living expenses.  Take a look at your budget and pick out the basics, like food and transportation, as well as fixed, monthly expenses, including insurance and loans.
  • A secured credit card: These cards are dedicated to consumers with bad credit or none at all. If you’re ready to rebuild, then take a look at the Capital One Secured MasterCard. The issuer will ask that you make a down payment, and then you’re ready to go with a $200 credit limit.  The card accommodates bad-credit consumers of various degrees of need: they’ll use your credit score to calculate your down payment, from as little as $49 to $200. Make payments on time, and you’ll elevate your credit limit as well as prepare to graduate to a regular card.
  • Your local credit union: These institutions are not-for-profit, and they’re also generous to those in need.  They offer financial-literacy resources as well as lines of credit that can help you repair your score.

Be prudent, avoid the scams, make your payments on time, and don’t be afraid to ask for help. Eventually you’ll get back on your feet.