Watch out for shady credit counseling agencies

The government has made a list of a number of unscrupulous financial advice companies, but a large number of others are still doing business. The most recent crackdown by the IRS on nonprofit credit assistance companies is hardly finished.

New bankruptcy legislation, approved in 2005, had the unheard of provision that an individual filing for debt relief through personal bankruptcy must first enroll in a credit counseling session. The requirement for mandatory credit counseling hasn't actually worked out; most people who seek counseling have found it necessary to apply for bankruptcy, nevertheless. The idea of mandating credit counseling is laudable, at least in concept - people without any proper financial education might learn about handling money and maybe avoid bankruptcy.

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The Internal Revenue Service has recently revoked the tax-exempt status of dozens of businesses that were found to be taking advantage of their customers, often by enrolling them in expensive debt repayment plans that may or may not have been in the customers' best interests. The credit assistance requirement has created a bit of a rush as people contact credit guidance companies. Washington has unknowingly created a fairly lucrative business for those who choose to take part in credit counseling and profit from of people.

How can you pick a credit counselor? How can you be sure of getting someone who will aid you rather than hurt you?

Here are some indications that may hint that the agency is not making an attempt to help you:

The company says that you will save money because they are "nonprofit." Although the new bankruptcy law requires that all agencies be nonprofit, there is no inherent benefit to a nonprofit company. A not for profit counseling agency may or may not help you; the fact that they are "nonprofit" has nothing to do with it.

The business provides only vague figures regarding how your debts will be handled instead of precise figures for each of your lenders and creditors.

The credit counselor requests payment before they perform any services or lean on you to give what they refer to as "voluntary contributions."

The counseling agency guarantees "lower payments." They can't lower payments in reality; they can just make arrangements to lower the interest rate. A reduced rate of interest may yield a smaller payment, but claims of "cutting your payments by 50%" are pipe dreams, so don't be fooled by it.

The agency suggests that you include your student loans in your debts. Student loans cannot be negotiated, nor may they be wiped out via bankruptcy. Any responsible counselor will know what sorts of financial obligations may be forgiven and which ones may not.

You might do an Internet search to see if you can find any information about how a specific agency has treated previous customers. You may wish to check with your local chapter of the BBB or Chamber of Commerce to see if anyone has complained about the agency. Any company engaged in any of the items listed should be regarded with caution.

The Internal Revenue Service does have some information about some of the agencies which have had their tax-exempt designation taken away at their Website. It wouldn't hurt to talk to other people you know to see if they have had any experiences with the company in question.

One thng you don't want if you are about to file for bankruptcy is to deal with a financial counseling company that will make your money situation even worse.