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In consumer counseling programs, education and guidance are provided, typically by a nonprofit organization and may include education, budgeting and debt management, working openly with creditors to develop a payment plan and forging agreements to avoid penalty interest or late charges. In debt settlement, there are no such upfront agreements with creditors.
“Debt settlement programs typically are offered by for-profit companies, and involve the company negotiating with your creditors to allow you to pay a ‘settlement’ to resolve your debt,” according to the Federal Trade Commission. “The settlement is another word for a lump sum that's less than the full amount you owe.”
Settlement In Minnesota
According to the Minnesota Department of Commerce, debt settlement companies must obtain a license and provide a surety bond plus other background information. However, a physical presence in the state is not mandatory. In fact, of the 10 debt settlement firms shown as licensed in Minnesota, not one is headquartered there.
Consumer fees may be charged based on either a percentage of debt owed, or as a percentage of savings negotiated by the company. Be aware that origination fees may reach $500 for debt exceeding $20,000 and monthly fees may reach $75 for debt exceeding $40,000. Read Minnesota 332B statute for more details.
What To Look Out For
Unfortunately, some companies may attempt to take advantage of your situation. According to the Star Tribune, “The Minnesota attorney general's office has sued a number of debt settlement companies in recent years for preying on vulnerable consumers.” Use care in selecting a debt settlement company.
The Federal Trade Commission offers advice on avoiding debt settlement scams. The FTC suggests you should avoid doing business with any company that promises to settle your debt if the company:
- Charges fees before it settles your debts
- Promotes a "new government program" to bail out personal credit card debt
- Guarantees it can make your unsecured debt go away or be paid off for pennies on the dollar
- Tells you to stop communicating with your creditors, but doesn’t explain the serious consequences
- Tells you it can stop all debt collection calls and lawsuits
You can find more information on the Federal Trade Commission's Money Matters site.
Where to Find Help
It may be useful to start with the list of licensed Minnesota debt settlement companies as part of the Minnesota Attorney General’s top 10 list of consumer tips for finding legitimate help.
Here is how credit counseling works in Minnesota. The state requires its credit counseling services to register with the state's Department of Commerce. Before you choose your service, check with the department to see if they're properly on the list. Minnesota also offers additional tips about what to look for in a credit counseling organization at its Commerce Department website.
Once you've confirmed that you're working with a reputable agency, what follow are some key points to help you create a successful credit-counseling arrangement.
When to Use It
Credit counseling is a path to bringing personal debt back under controls and restoring your credit history to a healthy place. It's also a requirement, in most cases, before you can qualify for bankruptcy. But note that, even if Chapter 7 or Chapter 13 aren't in your future, you won't be able completely clear your credit history through credit counseling. You can, however, clear the way to a better financial future and improve the credit score lenders use.
How It Works
Credit counseling agreements start with agencies set up to help consumers. These agencies make deals with creditors that lead to lower interest rates and smaller monthly payments. It can be a several year process and can include a monthly payment to the credit counseling service. Additionally, the consumer typically pledges not to apply for — or use any — new credit while the agreement is underway. A credit counselor may also help to settle a debt outright with a creditor.
For Minnesota Residents Only
If you're going to file for Chapter 7 or Chapter 13 bankruptcy in Minnesota, you'll need to use an approved credit counselor first. While Minnesota doesn't mandate caps on what a credit counseling service can charge, the Department of Commerce suggests that consumers not spend more than $10–$20 in startup fees and then not more than $20 in fees per month. (Minnesota's Attorney General warns that for-profit services are prohibited from collecting upfront fees; nonprofits and some types of attorneys may collect a startup fee for credit counseling.)
Minnesota is a proactive credit counseling state. If you have questions or complaints about consumer credit service organizations, call the state's Consumer Response Team, part of the Department of Commerce, at (651) 539-1600 or toll free at (800) 657-3602.