You're knee deep in debt. You've tried budgeting, talking to your creditors and other self-help methods of controlling your debt, and it just hasn't done any good. Don't give up! Don't panic! Give credit counseling or debt management a try before you think about filing for bankruptcy.
What is Credit Counseling?
Reputable credit counseling services will do the following:
- Advise you on managing your money and debt
- Help you develop a budget
- Offer free educational materials and workshops
Credit counselors are certified and trained in the areas of consumer credit, money and debt management and budgeting. Counselors will discuss your entire financial situation and will help you develop a personalized plan to solve your money problems.
Choosing a Credit Counseling Organization
Most credit counselors offer their services through local offices, the Internet or on the telephone. If possible, you should seek one that offers in-person counseling. You should develop a list of reputable credit counseling organizations and ask that they provide you free information brochures about their services. The following organizations often offer credit counseling services:
- Colleges and universities
- Military bases
- Credit unions
- Housing authorities
- County or cooperative extension services
Your financial institution, local consumer protection agency, church, family and friends may be a good source of information and referrals. The US (Bankruptcy) Trustee Program has a list of approved credit counseling agencies in your area. Each state's Attorney General's office, local consumer protection agency and Better Business Bureau can give a list of any complaints filed against the agencies on your list.
Be wary! Many credit counseling organizations are nonprofit and offer their services for free or for a modest fee. However, there are for-profit credit counselors that may charge a high fee and others that may bill themselves as "nonprofit" and "free" but require you make an upfront "donation" or "voluntary" contribution.
Questions to Ask
After you've narrowed your list of credit counseling agencies, contact your final candidates and ask:
- What services do you provide? You want budget counseling and debt management classes, not debt management plans discussed below
- Will you help me avoid debt problems in the future?
- What are your fees? Are there any upfront or monthly fees? Get it in writing
- What if I can't afford your fees?
- Will I have a formal written agreement or contract with you? Always read what you sign
- Are you licensed by the state?
- What are your counselors' qualifications? Are they accredited or certified by an outside organization? If so, by whom? If not, how are they trained? Avoid agencies that train or certify their own counselors
- How will you keep my personal information private?
- How do you compensate your employees? Avoid any agency that pays their employees based on whether they sign you up, pay a fee or make a contribution
Debt Management Plans
Be wary! A debt management plan (DMP?) isn't credit counseling! It's a method of reworking your unsecured debt (credit cards, medical bills and school loans) at lower interest rates or waived fees. A DMP (?) requires you to make regular timely affordable payments over a long period of time, usually more than four years. In return, you agree not to apply for or use any more credit.
Short of filing for bankruptcy, it should be the only option available to you before you agree to enroll in one. Make sure that the plan considers (not necessarily includes) all of your fixed expenses and secured debt (mortgage, car loan) before you commit. You don't want to be left without enough income to pay your other bills.
Debt Negotiation Programs
Stay clear of credit counseling agencies that promote debt negotiation services! They're extremely risky and may have a negative impact on your credit report. Many claim to be nonprofit organizations and:
- Guarantee that they can reduce or remove your unsecured debt
- Require substantial monthly fees
- Demand payment of a percentage of savings
- Tell you to stop making payments or communicating with creditors
- Require you to make monthly payments to them, rather than to your creditors
- Claim creditors won't sue you for nonpayment of unsecured debt
- Promise that using their system won't have negative impact on your credit report
- Claim that they can remove accurate negative information from your credit report
If you have a complaint about a credit counseling organization or debt negotiation firm, you should contact the Federal Trade Commission or see your attorney.
Question For Your Attorney
- Given my circumstance, should I try credit counseling or should I try to enroll in a debt management program?
- I would like to report a credit counseling agency. What do I need to do?