What is Credit Counseling?
There are many professional services that you can seek out if you have a debt problem…Some companies will offer to slash your debt in half, some will offer a loan at a low interest rate, but credit counselors are “impartial non-profit organizations” that can help you:
1) negotiate with creditors
2) create a monthly budget
3) set up a debt management plan (without the agenda to make money off of you.)
Most credit counseling services operate as non-profit groups and for the most part offer their services for minimal or no costs. The majority of non-profit credit counseling organizations are accredited through the Aiccca or the NFCC and provide financial counseling and repayment strategies. Getting in contact with these two companies is a good place to start when looking for an accredited non-profit credit counselor.
How is credit counseling different from debt settlement or consolidation?
Credit counselors are in essence, financial educators, coaches, and partners. They can help you create a reasonable monthly budget, set up a debt management plan, and help you directly negotiate with creditors. They may be able to stop the majority of creditor phone calls or any possible legal actions, by helping you work your creditors directly and developing a plan to repay them.
Credit counselors that are accredited by the NFCC or Aiccca might be considered more trustworthy compared to other types of debt services. They are funded with voluntary contributions by creditors, private grants, or some fees by customers. Other types of debt services (debt settlement, consolidation) may focus more on profit at the expense of your best interests. Advice from for-profit companies in the debt industry may be skewed towards selling their service, even if it would make the most sense to negotiate with creditors on your own, or file for bankruptcy. That’s NOT to say that they are all looking to scam you, but it is important to be cautious. If you are handing over something as important as your finances, you need to be able to trust who you are working with 100%. A credit counselor seems to be the place where you can get the most honest, truthful answers about your debt.
Getting set up on a Debt Management Plan
Debt management plans are set up by a counseling service to help you pay down your debt each month, at a rate that your creditor agrees to. With a credit counseling DMP, you make monthly payments directly to a bank account set up by the credit counseling service. Money is then taken out of this account every month, by the DMP to pay off your creditors. These plans usually last 2 – 4 years and will continue until your bills are completely paid off. A counselor can often help to reduce interest rates and fees, by arbitrating between you and your owed creditors.
One important thing about a debt management plan is that it can save your credit score from being damaged. When you sign up, a comment will be added on your credit report stating that you are working with a DMP, but this will NOT cause your score to drop a single point. It is possible that some creditors may view working with a debt management plan as a negative, but the majority of creditors only look at the score. These comments on your report will still not affect you as negatively as a late payment will.
Advice on if you Should Seek Bankruptcy
If it isn’t realistic for you to pay off your debts with a debt management plan, then something you might consider is bankruptcy. Credit counselors can give you impartial advice, and help guide you through the bankruptcy process, if you decide that is your best move. There is alot to learn about bankruptcy as well as different types you can pursue. The different types include Chapter 7 which is an asset liquidation, and Chapter 13 which is more of a a debt restructuring. Sometimes a debt is too large or income is too small to negotiate repayment, so bankruptcy will be the only suitable option. If you were to seek advice from a debt settlement company, they would obviously dissuade you from bankruptcy, and steer you towards settlement. Counselors have nothing to gain or lose by steering you in a certain direction, that is why their advice is so valuable.
Are All Credit Counseling Services Created Equal?
Recently the FTC has been concerned about certain credit counseling programs that aren’t functioning as real non-profit groups. These programs are focusing on getting all clients into their Debt Management Plans and demanding payment, even if it isn’t affordable for the client (this is not how non-profits should operate). There have been multiple lawsuits by states attorney generals, shutting down these unlawful companies, but there may still be some in operation. These illegitimate credit counselors were accused of being deceptive about the costs and effectiveness of their programs.
Another issue you might need to watch out for, is to make sure your DMP pays all your bills on time, every time. When you enroll in a DMP, your counselors are supposed to pay all your bills on time, out of your escrow account. The FTC notes that there have been some instances where creditors were paid late or NOT AT ALL. The FTC recommends that you follow up and make sure these bills are actually paid. Even though these counselors are supposed to completely handle all the payments to your creditors, you still need to do exercise due diligence and make sure everything is handled properly.
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