Living paycheck to paycheck? Feeling stressed about debt collectors? Having trouble creating a budget or saving for retirement? If any of this sounds familiar, you might be thinking about seeking help from a credit counselor.
Most reliable credit counselors operate as non-profits and offer services in person, online, or over the phone. If possible, try to find an organization that provides face-to-face counseling. Many universities, military bases, credit unions, housing authorities, and U.S. Cooperative Extension Service branches run non-profit credit counseling programs. You can also ask your bank, local consumer protection agency, or trusted friends and family for recommendations.
However, keep in mind that being a non-profit does not always mean services are free, affordable, or trustworthy. Some credit counseling agencies charge high, hidden fees, while others pressure clients into making "voluntary" contributions that can push them further into debt.
Choosing a Credit Counseling Organization
Reputable credit counseling agencies can help you manage your money, create a budget, and understand your debts. They also provide free educational resources and workshops. Their counselors are certified and trained in consumer credit, debt management, and budgeting. They will go over your entire financial situation and work with you to create a personalized plan to get your finances under control. The first session usually lasts about an hour, with additional follow-ups available if needed.
A trustworthy credit counseling agency should provide free details about their services without asking for personal financial information upfront. If an organization refuses to do this, consider it a warning sign and look elsewhere.
Once you have a list of potential counseling agencies, research each one through your state Attorney General’s office and local consumer protection agency. They can tell you if any complaints have been filed. Keep in mind that a lack of complaints does not necessarily mean an agency is reputable. The United States Trustee Program also maintains a list of approved credit counseling agencies for pre-bankruptcy counseling.
After completing your research, interview the final candidates to ensure they are a good fit for your financial needs.
Questions to Ask
Here are some important questions to help you choose the right credit counselor.
What services do you provide? Look for an organization that offers a variety of services, including budget counseling and classes on savings and debt management. Be cautious of agencies that push a debt management plan (DMP) as the only solution before fully reviewing your financial situation.
Do you provide educational materials? Are they free? Avoid agencies that charge for information.
Will you help me develop a long-term financial plan? A good counselor should not only address your immediate financial concerns but also assist you in planning for a more stable future.
What are your fees? Are there any setup or monthly fees? Request a written estimate of all costs.
What if I can’t afford to pay? If an organization refuses to help because you can’t pay their fees, find another option.
Will I receive a formal written contract? Never sign anything without reading it carefully. Ensure that all verbal agreements are documented in writing.
Are you licensed to operate in my state?
What are the qualifications of your counselors? Are they certified by an independent organization? If not, what kind of training do they receive? Choose an agency where counselors are trained by a third-party organization.
How do you protect my personal information? Make sure your personal and financial details, including your address and phone number, remain confidential and secure.
How are your employees compensated? If they receive higher pay based on selling certain services, charging fees, or collecting donations, consider it a warning sign and look elsewhere for assistance.
Debt Management Plans
If your financial difficulties are due to overwhelming debt or trouble making payments, a credit counseling agency may suggest a debt management plan (DMP). However, a DMP is not the same as full credit counseling, and it may not be right for everyone. Do not agree to a DMP unless a certified credit counselor has thoroughly reviewed your finances and provided personalized money management advice.
Even if a DMP is a good fit for your situation, a reputable credit counseling agency should still help you create a realistic budget and teach financial management skills to help you stay on track.
How a DMP Works
A debt management plan (DMP) involves depositing money each month with a credit counseling agency, which then distributes payments to your unsecured debts, such as credit card balances, medical bills, and student loans. The payment schedule is developed by the counselor in coordination with your creditors. In some cases, creditors may agree to reduce interest rates or waive certain fees. However, it’s essential to verify these concessions directly with each creditor to ensure they align with what the counseling agency has promised.
For a DMP to work, you must make regular, on-time payments. Completing the program can take 48 months or longer, so ask the credit counselor for an estimated timeline before enrolling. Additionally, you may need to agree not to apply for or use any new credit while participating in the plan.
Is a DMP Right for You?
Beyond the general questions to ask a credit counselor, consider these key points if you are thinking about enrolling in a DMP:
Is a DMP my only option? Will you provide ongoing budgeting advice even if I don’t enroll in one? If an organization only offers DMPs, look for another agency that also helps with budgeting and money management.
How does your DMP function? How do you ensure that all my creditors receive payments on time and within the correct billing cycle? If you decide to enroll, choose a plan where creditors are paid before due dates to avoid additional fees or penalties.
How is my payment amount determined? What happens if I can’t afford it? Do not sign up for a DMP if the monthly payment is more than you can reasonably pay.
How frequently will I receive updates on my accounts? Can I check my account status online or by phone? Ensure the agency provides regular, detailed statements on your payments and balances.
Will my creditors reduce interest rates, eliminate finance charges, or waive late fees? If so, verify these terms with your creditors and ask how long you need to be on the plan before benefits take effect.
Which debts are not covered in the DMP? This is crucial because you will still be responsible for handling those payments separately.
Do my creditors require an initial payment before accepting the DMP? Some creditors ask for a payment before they agree to the plan. If a credit counselor tells you this is necessary, confirm it with your creditors before sending any money to the agency.
How will enrolling in a DMP affect my credit? Be cautious of agencies that claim they can remove accurate negative information from your credit report – this is not legally possible. Accurate negative marks may remain on your credit report for up to seven years.
Can you request that my creditors "re-age" my accounts to show them as current? If so, how many payments must I make before that happens? Keep in mind that even if your account is re-aged, past late payments or delinquencies may still appear on your credit report.
How to Make a DMP Work for You
Following these steps can help you successfully complete a Debt Management Plan (DMP) and prevent further financial trouble:
Keep paying your bills until your creditors officially approve your DMP. Stopping payments too soon can result in late fees, penalties, and damage to your credit report.
Confirm with your creditors that they have accepted the plan before sending any payments to the credit counseling agency.
Verify the payment schedule to ensure your debts are paid before the due date each month. Making payments on time helps avoid late fees and other charges. Consider calling your creditors at the start of each month to confirm payments have been made.
Check your monthly statements to make sure your payments are being applied correctly.
Review any concessions offered by your creditors, such as lower interest rates or waived late fees. Ensure these adjustments appear on your statements.
The Telemarketing Sales Rule
The Telemarketing Sales Rule (TSR), enforced by the Federal Trade Commission (FTC), requires debt relief companies to be upfront about their fees and conditions before enrolling consumers in their programs. It also prohibits companies from charging fees before settling or reducing debt. For credit counseling services that offer DMPs, this means they cannot collect payment until you have officially entered the plan and made at least one payment toward your debts.
Other Debt Relief Options
While credit counseling and a DMP are common ways to manage debt, other options may be available.
Negotiate directly with your creditors. Even if you have been denied before, it’s worth reaching out to your credit card company. Instead of paying a third party to negotiate on your behalf, you can do it yourself for free. Contact the number on your credit card or statement, be persistent, and explain your financial situation. Your goal should be to set up a manageable repayment plan.
Understand charge-offs. If you do not make payments for 180 days, your creditor may write off your debt as a loss, significantly impacting your credit score. However, even after a charge-off, creditors may still be open to negotiations.
Bankruptcy. While filing for bankruptcy has serious consequences, financial experts say that, in some cases, it may be the best solution.
Chapter 13 Bankruptcy allows individuals with a steady income to retain assets such as a home or car. The court sets up a repayment plan lasting three to five years, and once all payments are made, the remaining debts are discharged. However, you will need to pay legal fees and obtain credit counseling from a government-approved organization within six months before filing.
Chapter 7 Bankruptcy requires passing a means test to show your income is below a certain level, which varies by state. Filing fees and attorney costs apply, so research requirements through the U.S. Trustee Program within the Department of Justice.
Debt Settlement. Debt settlement programs, usually run by for-profit companies, involve negotiating with creditors to settle debts for a lump sum that is lower than the total amount owed. These programs typically require you to deposit money into an escrow-like account each month until you have saved enough to pay a settlement.
While debt settlement may help with some debts, these programs carry risks. Some companies mislead consumers with false promises, and others engage in illegal practices, such as charging fees before securing a settlement, which violates the TSR. Before considering debt settlement, carefully research any company offering these services to avoid potential scams or financial harm.
Mary Watson
