I HARDLY EVER RECOMMEND THIS TYPE OF PROGRAM. However, some of you have asked me to explain a little bit about Credit Counseling as a way to get out of debt and how it works.
Credit Counseling was actually created and is funded by your credit card companies. Initially, it was a way for them to recover money from people who were not making payments. Instead of losing that money or spending more money (through collections and lawyers) to try and recover it, they created a "safe" place for a consumer to go so they still get something. Actually, they get all of the balance owed and interest. It has now evolved into a billion dollar industry.
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Normally, a credit counseling company will negotiate a reduced interest rate on your credit cards (your creditors would have to accept this proposal and may not reduce the interest rate at all, it all depends on your financial situation and the credit counseling company's relationship with your creditors). Most often than not, most credit counseling companies usually have a pre-arrangement with the creditors. They know how much the creditor will reduce the interest rate by, how much they will get at their "fair share" of the monies collected, etc.
On average, you can expect to pay back your entire balance at 6-12% interest. Again, this is not a promise but a general guideline. When speaking with a credit counseling company, they should give you the exact terms and conditions before you retain them. They will also try to have late payment and over-the-limit fees forgiven. This generally takes place once you've established a six month track record of good payments.
Credit Counseling companies make their money several ways. First, don't be fooled about non-profit status. All that means is that at the end of the year, the company shows no profit. They still get healthy salaries; spend advertising dollars to get clients (just like for-profit companies do). Also, non-profit status does not indicate honesty, integrity or even reliability.
Credit counseling agencies normally charge a set up fee and monthly fee (they will describe this as a "contribution"). They also receive what is referred to as a "fair share". When they set you up on monthly payments (remember, you are paying the balance and interest) to that creditor, they will receive a percentage of what they recover from you.
In order for credit counseling to work, you must have sufficient income to pay your basic bills. Once enrolled, make sure that your payment arrives in time for your funds to be disbursed to your creditors. Otherwise, you may be charged additional late fees and other charges, in addition to adversely affecting your credit profile.
You must stay in this type of program until all of your bills have been paid in full, plus interest.
Depending on the amount of debt you have, paying off your bills by using a credit counseling company will take anywhere from 2 - 8 years to accomplish. You still have to pay back the entire balance plus interest, but if you are looking for a place to make one payment and don't mind paying all that money back to your creditors, this type of program is for you.
Understand that at least 60% of all people who enroll in a credit counseling type program fail to complete it. Your credit report will also be affected. Once your credit card company reports to the Bureaus that you are participating in a credit counseling program, you may have a difficult time obtaining credit. Most credit card companies treat credit counseling on the same level as a bankruptcy.
On the subject of Bankruptcy, part of new "means test" for someone having to seek relief under Chapter 7 - where debts can be wiped out entirely -- except under special circumstances, are required to first seek credit counseling services and receive a certificate of insolvency.
Don't be confused or intimidated by this new law. Don't let anyone tell you that it is more difficult or impossible to file for relief under Bankruptcy. Always explore all of your options.
The National Association of Consumer Bankruptcy Attorneys released a study that concluded that forcing consumers into credit counseling - a key provision of the reform Act, was a waste of money and did little to weed out the deadbeats trying to use bankruptcy to avoid paying their debts.
There were six major credit counseling firms surveyed that dealt with 61,335 pre-bankruptcy filers. Out of those 63,335 people, only 3.3 percent of people in the study were eligible for a debt management plan and could not file for relief under Chapter 7.
Additionally, 79 percent of those surveyed were seeking bankruptcy due to circumstances beyond their control, defined as emergency medical expenses, loss of employment, higher minimum payments on credit cards, change in marital status or other unexpected events.
The lawyers' group said the other 21 percent of filers included people who did not "deliberately seek to accumulate excessive debt" but fell prey to finance charges and their own lack of financial sophistication over time.
Be aware that the credit counseling company that you go to for this consultation will charge you $50 - $100.
Before you enroll in this type of program make sure it's right for you. And then make sure your consumer credit counseling agency offers the services that are important to you, such as educational programs to help you avoid repeating the mistakes of the past. Make sure that the company is in good standing with the Better Business Bureau. With this as with all of your options, please talk to several companies before you make a decision. You are most likely going to be working with the company you choose for the next several years, so choose wisely.
In all honesty though, if you find yourself in a financial pickle, look at debt settlement as your first option. From there, if you don't qualify you can look at either qualifying for credit counseling or dropping $100 at their door on the way to your Bankruptcy attorneys office.
To learn about your financial options and managing you debt, log onto www.debtreliefoptions.com.
Jon Noble
Staff writer
Debt Relief Options
asktheexperts@debtreliefoptions.com
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