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Credit Counseling and Debt
Management Plans
Credit Counseling
If you are not disciplined enough to
create a workable budget and stick to it, cannot work out a repayment plan with
your creditors, or cannot keep track of mounting bills, consider contacting a
credit counseling organization. Many credit-counseling organizations are
nonprofit and work with you to solve your financial problems.
Most credit counselors offer services through local offices, the Internet, or on
the telephone. If possible, find an organization that offers in-person
counseling. Many universities, military bases, credit unions, housing
authorities, and branches of the U.S. Cooperative Extension Service operate
nonprofit credit counseling programs. Your financial institution, local consumer
protection agency, and friends and family also may be good sources of
information and referrals.
Regardless of your particular need, selecting the right credit counselor is
vital. Unfortunately, some organizations, including some that label themselves
"nonprofit credit counseling agencies," can be underhanded and more concerned
with helping their own bank accounts than helping yours. An April 2005 report by
a U.S. Senate investigating committee reported, "Some new entrants to the
industry, however, have developed a completely different business model - a
'for-profit model' designed so that their non-profit credit counseling agencies
generate massive revenues for for-profit affiliates.
Consumers need to know and understand the differences when selecting a credit
counselor. They must know the warning signs. The following information can serve
as a valuable guide to help consumers "know the difference" when choosing a
credit counseling agency.
1. Ask the BBB (Better Business Bureau) and other third parties about the
agency. A number of independent or government organizations work to protect
consumers by collecting complaints and making the information public. The BBB is
one such agency.
2. Be skeptical of extravagant promises. Some organizations claim they can "fix"
a bad credit report or credit score. Others say they can settle a consumer's
debts for relatively little money. If an agency sounds too good to be true, it
probably is. Reliable credit counselors help people manage their money better
and, if appropriate, can set up a realistic repayment plan that is acceptable to
creditors.
3. Make sure counseling sessions are substantial. The length of a counseling
session will vary from agency to agency, but consumers need to make sure the
counselor takes enough time to understand your personal situation
4. How does the agency protect consumers' money? Consumers need confidence that
any funds they hand over to an agency for debt repayments are secure. Consumers
need to ask for evidence that an agency is bonded or has insurance that protects
their money from fraud or the agency's own financial difficulties.
Debt Management Plans
If your financial problems stem from too much debt or your inability to repay
your debts, a credit-counseling agency may recommend that you enroll in a debt
management plan (DMP). A DMP alone is not credit counseling, and DMPs are not
for everyone. You should sign up for one of these plans only after a certified
credit counselor has spent time thoroughly reviewing your financial situation,
and has offered you customized advice on managing your money. Even if a DMP is
appropriate for you, a reputable credit counseling organization still can help
you create a budget and teach you money management skills.
In a DMP, you deposit money each month with the credit counseling organization,
which uses your deposits to pay your unsecured debts, like your credit card
bills, student loans, and medical bills, according to a payment schedule the
counselor develops with you and your creditors. Your creditors may agree to
lower your interest rates or waive certain fees, but check with all your
creditors to be sure they offer the concessions that a credit counseling
organization describes to you. A successful DMP requires you to make regular,
timely payments, and could take 48 months or more to complete. Ask the credit
counselor to estimate how long it will take you to complete the plan. You may
have to agree not to apply for — or use — any additional credit while you are
participating in the plan. As above, here are also things to look for when
looking for a Debt Management Plan.
1. ALL payments sent to the agency should go to creditors and be disbursed in a
timely manner. Some agencies may take the entire first month's payment and call
it a "fee" or "donation." Consumers should ask whether this is the agency's
policy. It is also a good idea to ask whether the agency holds payments or
disburses them shortly after receipt. The success of a DMP relies upon full and
timely payment to creditors to reduce a client's debt.
2. Does the agency provide a full range of services, or is it just trying to
push a profitable Debt Management Plan? Consumers should seek out an agency that
provides a full range of services and tailors plans to each consumer's personal
circumstances.
3. The full amount of Debt Management Plan repayments should go to creditors.
Some agencies may take a portion of a consumer's debt repayment and call it a
fee or "donation;" others may even take the entire first month's payment.
Consumers should find out how much of each monthly payment is going to creditors
and how much is going to the credit-counseling agency. The full amount of those
payments should be paid to creditors to reduce the client's debt.
4. Make sure the agency will work with all of your creditors. Before entering a
DMP, consumers should make sure the agency would work with all of their
creditors. Some agencies may refuse to work with creditors unless the creditor
agrees to a certain level of financial support for the agency. No agency can
require creditors to recognize a DMP program, but the agency should be willing
to reach out to every creditor.
If debt has consumed you, and your life is getting more difficult by the day,
then Debt management and credit counseling are probably two very important
choices to consider. If you have severe debt, you may be eligible to enroll in a
Debt Management Plan. It takes approximately 36-60 months to repay debts through
a DMP. This is sometimes the best alternative to debt freedom.
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