When people go into deep debt, they often think that the only solution to the problem is to simply get a bankruptcy and start over again. Bankruptcies, though, aren’t exactly “starting” over—they stay on your credit record for years and also make you look bad to potential lenders. So what are you supposed to do if you’ve got deep debt? You could take the bankruptcy route and damage your credit more or you could do something else that will allow you to get out of debt while not further harming your credit: credit counseling.

What is Credit Counseling?

Credit counseling is essentially debt counseling. When you get into a lot of debt and are unable to pay it off on your own, you’ll go to a credit counselor who will tell you the best method of paying off the debt. Credit counseling gives you an effective way of paying off whatever credit card debt you may have.

When should I consider Credit Counseling?

Anyone who has debt which they cannot pay off should consider credit counseling. Credit counseling offers you a way out of the mess of credit card debt. Qualified and experienced credit counselors can look at your debt and determine the best way of paying it off. Depending on how much debt you have, your counselor may tell you about a debt reduction plan to help rid yourself of the debt.

What is a Debt Reduction Plan?

Under a debt reduction plan, your counselor will consolidate all your debts into one monthly payment which you give to the counselor who then disperses it to creditors. Your counselor will also attempt to lower your interest rates and will arrange payments to each creditor in a way that enables you to pay off the debt as quickly as possible. Most debt reduction plans last anywhere from 12-60 months, although people with a huge amount of debt ($30,000 or greater) may end up in a debt reduction plan of longer than 5 months. How long your debt reduction plan lasts will entirely depend on how much you can afford to set aside for your bills each month and how much debt you have.

Why is Credit Counseling Effective?

Credit counseling is effective because those who work as credit counselors are able to financially analyze any situation and tell the person who is in debt what the best option is for them in regards to paying off the debt. They are able to create individualized plans for anyone who is debt.

Why is Credit Counseling NOT Effective?

Generally speaking, most credit counseling is effective. However, if you go to a credit counseling agency that is unaccredited and dishonest, you will run into big problems. In fact, you may even be worse off than before. That’s why picking the right credit counseling agency is extremely important.

How do I pick the right Credit Counselor?

The first step toward selecting a credit counselor is to open your phone book. Look for the section of the yellow pages about “Credit counseling”.

Take a look at each listing—there should be at least one local credit counseling agency in your area. As you look at each listing, make note of the name of the counseling agency.

After you’ve come up with a list of agencies, log on to Google.com and google each agency. Really research each agency so that you do not end up with one that isn’t effective. You may want to check out http://www.nfcc.org/ for a list of accredited credit counseling agencies. Those agencies that are accredited are usually the most effective ones.

Questions to Ask a Credit Counselor

Once you narrow the list down to potential suitors, you’ll still have some work to do before you can pick a good credit counselor. Each agency that you may consider should offer a free session. Take advantage of this session to ask the counselor some of the following questions:

• What fees are associated with using this counseling agency to get out of debt? While virtually every counseling agency is non-profit, they will still all charge some fees to help cover administrative costs. Generally speaking, you will not want to choose an agency that charges more than $50 a month for their services.
• How will you tackle my debt?
• Will you employ a debt reduction plan?
• Will I have to pay any extra fees?
• It’s important to know how a perspective counselor will help you to get rid of your debt before you even sign up with them.
• How long will the plan take? In other words, how long will it take for me to pay off all this debt? Time is money, and if you’re looking to pay off your debt in a specific amount of time, perhaps a year or two, it’s important to ask how long it will take you to pay off the debt using this credit counseling agency.
• Are you accredited? It’s a legitimate question that you should ask every single perspective credit counselor. Good, accredited counselors will not mind this question. Those who aren’t will mind the question, and that’s a good indication that they are not right for you.
• Will you tailor your plan to fit my unique needs? Everyone’s situation is different and good credit counselors will take all of your needs into consideration when coming up with a plan. Make sure that the credit counselor that you are considering will be able to tailor fit a plan to you.
• Can I meet with you once a year to discuss my debt and how much I’ve paid off?

It’s important to stay updated when it comes to using credit counseling. Most credit counseling agencies will encourage meeting up with their clients once or twice a year to discuss details of the plan and how well it is working. They will also review your credit report with you.

Recommended Credit Counseling Agencies

It is often very difficult for some people to find credit counseling agencies that are respectable and legitimate. While the agencies below may not have offices in your city, some offer online services that you may be able to use.

• GreenPath – GreenPath has offices in many states and cities. They’ve helped millions of people get out of debt and are accredited.

• Delray CC – Delray offers completely free credit counseling services to millions of people. They are accredited and can counsel via the internet or the phone.

• MoneyManagement – MoneyManagement offers services both online and in person at their many locations. There are some fees associated with MoneyManagement, but they are minimal. MoneManagement is fully accredited and very effective.

Keep in mind that these are just three of the many possible credit counseling agencies that you can use to get out of debt. Check the NFCC for more possible options.

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.

Keeping a spending diary was a big eye-opener for my husband and myself.  Yes, it’s a huge pain in the arse to write down every penny you’re spending but it’s a vital step in seeing where money is going and also is an invaluable tool when setting up a budget.

I wasn’t too keen on the idea of keeping a spending diary when we were deciding it was time to get serious about getting out of debt.  I actually refused to do it at first because, as I told my husband, “You’re just going to use it as a way to criticize and judge every penny I spend” and there was no way I was signing up for that kind of misery.

So we made a deal.  There could be absolutely no judging or being critical about what was being spent.  The spending diary was a “fact finding” mission only.  But, just to be sure my husband wasn’t tempted to peek and say something negative to me, I kept my spending diary (just a cheap little notebook) with me at all times and never left it laying where he could easily pick it up and look at it (I love him but he’s just as prone to temptation as the next person!).

We decided to track our spending for a month because my husband and I are both paid monthly.  You don’t have to do it for a month if you don’t want to – even a week will help – but I think doing it for a month is much better because it gives a better overall picture of spending.

What did we find out in that month?  The biggest shock was our food and restaurant expenditures.  It was, by far, our largest spending category – almost $800 on restaurants alone!  And it wasn’t from going out every weekend to nice restaurants with white tablecloths and cloth napkins.  It was from being lazy and not wanting to cook 3 or 4 nights a week and going out to grab a bite instead or picking something up on the way home; or not feeling like packing a lunch and running out for lunch instead.

We also had a lot of what we labeled as “miscellaneous” spending – things that didn’t fit into our categories of: groceries, restaurants, Montana (not the state – our dog’s name; yes she got her own category.  She has to eat too); clothing; toiletries (toothpaste, shampoo, haircuts, etc.), entertainment (didn’t include restaurants but did include going to see movies, bowling, and class fees for crafts classes I take), cleaning supplies, and gifts (Christmas, birthday, wedding, anniversary and any other presents along with cards and wrapping paper).

We created a miscellaneous category because it’s hard to categorize some things like batteries, light bulbs, photo developing, ink and paper for our printer, parts to fix the leaky sink, potting soil, charcoal for the grill, a donation to a charity, a magazine, gym fee etc.  We thought about having a household category but decided against it because not everything I just mentioned fit into a household category so we still needed the miscellaneous category and because we wanted to have as few categories as possible so keeping track of a budget later on wouldn’t be so cumbersome.

We didn’t track our gasoline expense, mortgage, insurance, utilities, or credit card payments in the “spending diary” notebooks we used.  Those bills we were either paying online, paying with a debit card, or writing out a check so we already had a history of exactly how much we were spending on each of those things.

We also didn’t create a budget before our “spending diary” tracking.  We wanted to see where our money was going because it felt like it was flying out of our pockets.  I remember looking in my wallet a lot of times and wondering where all my money had gone.  That meant we spent like normal during our tracking period kinda.  After the month was up and my husband and I sat down to see how much we had spent and what we had spent it on we both admitted there were things we didn’t buy because we didn’t want to have to write it down (and no it wasn’t because we wanted to buy porn! – at least I didn’t).  For example, I love to buy books and magazines because I really enjoy reading.  But I never realized how much I was spending on them.  Once I started writing it down I started to become alarmed at how much money I was forking over for that reading material and by the end of the month I was already willingly cutting myself back.

My husband’s only shock from his spending journal was the amount of money he fed the vending machines at work for bottled water, soda, chips and candy bars. Hitting the vending machine for a beverage and snack a couple times a day doesn’t seem harmless (it’s just some quarters and dollar bills, right?) but added up over the course of a month it came to close to $100 for my husband and all he had to show for it was a few extra pounds on the scale.

Once we had our month’s worth of spending in front of us in black and white it was easy to see why we always had more month than money and why our credit cards got a major workout.

We were to the point of knowing how much debt we had and how much money we were spending.  The next step we did in starting to get out of debt was set up a budget.  That will be the next post in my “How To Get Out Of Debt Series.”

So do yourself a favor and keep a spending diary.  We wrote our spending in small notebooks we got 2 for a $1, but you can use whatever you want whether it’s a notebook, plain paper, your PDA, or the back of napkins.  How you keep track of the spending information isn’t important; doing it is.

Remember, you will only need to do this one time, whether it’s for a week, 2 weeks, or a month.  Then you’ll be ready to set up your budget.

Don’t wait any longer.  Start today!

Just so you’re prepared it may be agonizing slow…like watching paint dry on a humid day.

But before you can start getting rid of it you have to know how much you owe.

That’s step 2 in getting out of debt.  Most people who have a lot of debt don’t know how much they owe and don’t want to know because writing it down and seeing it in print will literally make them feel ill (as in “I’m going to puke all over that piece of paper right now” – gross but that was exactly how I felt).

I used to live in a constant state of denial and avoidance about my bills.  I wouldn’t open my credit card statements and did my best to be as far away from the house as possible when my husband was paying bills because I didn’t want to face him because I knew he would be justifiably angry when he saw them.  I would even sometimes pretend I was really sick so my husband would feel too guilty to yell at me.

My favorite response though was to cry and promise to not do it anymore (a promise I knew deep down inside that I had no intention of keeping).  I did some pretty awful things to avoid talking about the debt I was piling up.  It was irresponsible, juvenile, and a completely rotten way to treat my husband.

When I finally sat down with my husband and wrote down every penny of debt we had, and then added it up, I truly did literally start to feel ill.

But in order to pay off that ugly debt a person has to know how much there is.

So grab a pencil and piece of paper, and then go get all your bills from wherever you have shoved them so you didn’t have to look at them.  Open each bill and on that piece of paper write:

- The name of each creditor that you owe money to

- Total amount owed

- Minimum Payment

- Due Date

If you want you can also write down the interest rate of each bill.

Then add up all your minimum payments.  That’s the bare minimum you need each month to start getting rid of the debt.  But you’ll need to pay more than the minimum if you want to get the debt paid off in a reasonable amount of time.

To get enough money to pay those minimum payments plus as much extra as possible, do whatever you can to cut expenses and increaase your earnings.  It’s also a great time to sell anything you don’t need and to immediately use the proceeds to help pay a bill (not to go shopping for more stuff).  Sell whatever you can and be like Dave Ramsey says, “Sell everything but the kids.”

In step 3 I’ll talk about that 4 letter word – budget.  (Yes I can count.  Yes I know it’s more than 4 letters long.  But mentioning the word “budget” to some people causes a look of pain so severe to cross their face I wonder if I’ve just cussed them out without realizing it.)

Are you saying “Duh?”

A few years ago I would have.  I was in debt and wanted to get out of debt – or so I said.  I didn’t want the debt I had, but I wasn’t willing to do anything about it.

All I did was pay it lip service.

I hated the credit card bills and tearfully promised my husband nearly every month that I would stop using credit cards and would stop overspending.

But then I would be at a store and see a “great deal” on a pair of sneakers that I justified buying because they would motivate me to get out and walk more often because my feet would be comfortable.

Or…I saw “buy one get one free” on down pillows and I always wanted down pillows and they would help me sleep better and prevent me from getting a sore neck.

Or….I saw the cutest shirt on clearance ( marked down 90% to only $5!) and I couldn’t pass up such a great deal.

Or…..I would see a present that I was sure one of my kids would love for Christmas (it would only be March) and it was on sale so I would buy it and then be unable to wait to give it them so I gave it to them early (really early, like the next week – because they deserved a treat, right?).  Then at Christmas I still spent the same amount on them that I always did because that present I gave them early really hadn’t been a Christmas present.

Do you get where I’m going with this?  I was great at coming up with reasons why I just had to buy one more thing with my credit card…….in a never ending cycle of promising to stop spending and then going out and doing it anyway.

I said I wanted to get out of debt but my actions spoke a whole lot louder than my words.

Stopping the cycle of overspending and paying off debt is hard.  A person has to be willing to work very hard, make sacrifices, and go without things they want, and often postpone purchasing needed items.

My husband and I have cut our debt in half in the last 2 1/2 years which feels great and makes me proud of myself for finally taking responsibility for myself.

But it sure hasn’t been easy.  I still find myself in a section of the department store I have no need to be in and picking up things that I really want; only to have walk back to the shelf and replace the items after I  regain control of myself and shake off that “gotta have it mindset” I get in, and remember that I want to get out of debt more than I want that pretty, shiny, bright new item.

To be successful at stopping the cycle of overspending and getting out of debt requires intense concentration, a lot of personal fortitude and tons of determination.

I’m not trying to talk anyone out of making the effort to get out of debt.  I hope everyone who is reading this and who has debt will work on paying it off.  It’s just that I think a lot of experts downplay how hard it is and say to “just do it.”  That’s all fine and great but “just doing it” isn’t always so easy.  A person has to truly be ready to do it and be aware that it may be the hardest thing they ever do.

The reward is truly worth it though.  Ask anyone who is debt free and they will tell you.  My brother and sister-in-law paid off the last of their debt in 2008.  They don’t owe anybody any money – not even on their house.  My sister-in-law said it’s a feeling that is really hard to describe and that she never realized how great of a feeling it is.  She said it’s a huge weight off her shoulders and makes her happier than she ever thought possible.

I’m so anxious to experience that feeling for myself….and I will.  You can too.