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.