Reputable credit counseling agencies can provide a well-needed service of helping debtors establish open lines of negotiation with creditors, and hopefully eventually negotiate a successful repayment plan so consumers can avoid lawsuits or spiralling into uncontrollable debt.  Disreputable credit counseling agencies–often otherwise known as scam agencies–are another matter entirely.

Some credit counseling services take advantage of people who find themselves in financially (and emotionally) vulnerable positions.  Some go from taking advantage of consumers to outright stealing from them.  The Federal Trade Commission Act forbids “unfair or deceptive acts or practices” in credit repair and counseling agencies, and some states even have laws making it illegal for credit service organizations to advertise or claim they can improve credit ratings.  Some states also require that credit counseling organizations register with the state Attorney General’s office and obtain a surety bond before they can open for business.

But what about those agencies who either aren’t required to do that sort of thing, or manage to operate under the radar of the appropriate authorities while they bilk customers out of money in the meantime?  The absolutely best defense you can devise is a good offense–meaning educate yourself as much as possible.  Here are some questions to ask when researching credit counseling agencies.

1.  Is the agency accredited by one of the voluntary accreditation organizations, such as The National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies?  The NFCC acts as an independent, not-for-profit organization and has accredited more than 4,000 credit counseling programs that meet their standards.  The AICCCA is a similar national organization that has equally high standards for credit counseling agencies.  If an agency doesn’t belong to one of these two voluntary organizations, you may want to reconsider before signing up with that particular agency.

2.  Does the agency make outlandish claims that it can instantly repair your credit rating?  If so, it may be a good idea to run in the other direction.  The process of rebuilding credit is a gradual one, and it can’t be rushed.  For instance, it’s illegal to try and “fix” your credit history by constructing a new, false identity.

3.  Does the agency charge any improper or downright illegal fees that can be disguised as “contributions”?  If the agency charges high setup fees or monthly charges, that pretty much negates any good they can do for you by reducing finance charges or your debt obligation with creditors.  At that point, you’d likely be better off negotiating directly with creditors or filing for bankruptcy protection (via a reputable bankruptcy attorney).

4.  Does the agency request that you hand over money in order to obtain a promised loan?  Do not agree to do this!  The FTC’s Telemarketing Sales Rule dictates that no one can legitimately ask you for money until you actually receive a loan or line of credit.  You should learn as much as you can before agreeing to any debt consolidation loan, obtain all details in writing, and AVOID giving out your credit card, bank account, or Social Security information over the phone or via the Internet.

5.  Have any other consumers registered complaints against the agency with the state Attorney General’s office or local Better Business Bureau?  If so, that doesn’t automatically mean you shouldn’t deal with the agency, it just means you should get as much information as you can.  One or two complaints is to be expected against almost any business–dozens or hundreds of recent complaints, on the other hand, can be a severe red flag.

6.  Will your creditors even deal with that particular credit counseling agency?  If not, there’s obviously no point in signing up with the service.

7.  Is the credit counseling agency willing to put everything in writing, especially the specifics regarding the fees they will collect and the services they will perform?  If not, I think you can guess what my advice will be–RUN–do not walk–in the opposite direction.

8.  Do you understand the propoed written agreement with the credit counseling agency?  If not, you should either consult a knowledgeable financial services or bankruptcy attorney to make sure everything’s on the up-and-up, or decline to sign with that agency.  NEVER sign an agreement that you do not understand, in any sort of endeavor.

One last piece of advice:  should you find yourself the victim of any unscrupulous or fraudulent tactics on the part of any credit counseling agency or service, you should immediately report it to the consumer protection division of your state Attorney General’s office.  You can also lodge a complaint with the Federal Trace Commission Consumer Response Center by dialing (toll-free) 1-877-FTC-HELP or going to the FTC’s website to fill out their Consumer Complaint form.