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Credit Counseling

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Credit counseling Credit counseling (debt counseling in the U.K.) can involve nothing more than education on topics such as budgeting and financial planning but most times it involves negotiating with your creditors.  You can hire third party company to negotiate on your behalf.

These third party companies, or credit counseling agencies, won't pay off the debt for you but they will help you work out  payment plans (know as debt management plan or DMP), reduce principal debt amounts by reducing payments, fees, penalties and interest rates though negotiation with your creditors.

You'll make one monthly payment to the counseling agency, and they will in turn pay your creditors. Credit counseling programs usually do not impact your credit rating unless they have negotiated a "settlement". However if you are already behind on payments then your credit may already be impaired.

When talking with a professional credit counselor, he/she will want to look at your financial status to determine the total debt and the difference between your total monthly payments and total monthly income.

Do your homework before talking with them, i.e. write down your total monthly income, a list of creditors (who you owe money to), monthly payment amounts, and total outstanding debt if possible. The counselor will also look at your interest rates on all your loans, minimum amount on your credit card accounts and other financial obligations.

The result of the credit counseling financial analysis is a payment plan that fits your budget. It is set up in a way that creditors also benefit from it. Most legitimate creditors prefer to work with consumer credit counseling agencies because it saves them a lot of time and money.

It is a good idea to check the report of the credit counseling company you are going to deal with. Check with the Better Business Bureau or the Office of the Attorney General of your state. Also determine what their fees are before signing any agreement.

 

Debt Management Plans

(Some of the following info was obtained from www.ftc.gov)

If you have to much debt or can't repay your debt, the credit counseling agency may suggest that you enroll in a Debt Management Plan. A DMP alone is not considered credit counseling. You should only sign up after a certified credit counselor has thoroughly reviewed your financial situation and has given you advice on how to manage your money.

With a DMP, you deposit money each month with the credit counseling organization. They in turn use those funds to pay your unsecured debt such as credit card bills, utility bills, student loans or medical bills. Payments are made based on a scheduled developed by you, the credit counseling agency and your creditors. Your creditors may agree to waive certain fees and to lower interest rates. With a DMP you have to make regular payments on time. It could take up to 4 years to complete the program. Ask the credit counseling agency how long it will take to complete your plan and you should also check with your creditors yourself to see if they offer the lower interest rate and if they will waive the fees. You may have to agree to not using any credit while in the program.

Be wary of companies that : charge high up front fees, try to enroll you in a DMP without first thoroughly reviewing your situation, offer to enroll you in a DMP without reviewing your financial situation,  offer to enroll you in a DMP without teaching you budgeting and money management skills, demand that you make payments into a DMP before your creditors have accepted you into the program, or won’t send you free information about the services they provide without requiring you to provide personal financial information, such as credit card account numbers, and balances.

 

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