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Credit Counseling Services and Debt Management Plans

Is your debt out-of-control? Is so, consider the services of a credit counseling agency. Many consumer credit counseling agencies will offer free initial help with budget counseling. If you qualify, they also offer a debt management plan.

Proceed carefully. With no single industry credential for consumers to rely upon, it is hard to judge if a credit or debt counseling agency provides the services you need.

Recent research by the Consumer Federation of America and the National Consumer Law Center found that unlike traditional not-for-profit creditor-funded counseling services, newer not-for-profit agencies advertise debt counseling and then market consolidation loans.

For example, some strapped consumers respond to ads for help with creditors and get caught in advanced fee loan schemes. The debtor is asked to deposit money up-front to disperse payments to creditors (which are never paid) or charged substantial fees to obtain a “loan” (which you never get) to pay off bills. Some firms will even keep your initial monthly payment rather than apply it to your debt.

Debt Counseling and Debt Consolidation-Proceed With Caution. Many consumer credit counseling ads push free debt counseling and debt consolidation. Typically, the debt counseling will include creating a list of your debts, a list of your expenses, and then determine the monthly debt consolidation loan payment you can afford. The loan will carry interest charges. The single monthly payment may be less but over time finance charges will make your total loan costs exceed those of your individual loans. Since your monthly budget will be tight, there will be little flexibility for future spending until the loan is paid in full.

Consumer Credit Counseling. With traditional consumer credit counseling, a financial counselor reviews your spending habits, a list of your debts including interest charges, monthly payments, and amounts owed.

Debt Management Plans (DMP). If too much debt is causing your financial problems, a traditional credit counseling agency may recommend that you enroll in a DMP. A DMP alone in not credit counseling. You should sign up for a DMP only after a certified credit counselor has spent time thoroughly reviewing your financial situation, and has offered you customized advice on managing your money.

How DMPs Work. If you qualify, the agency arranges for affordable, and sometimes reduced, payments for debt service after making allowances for basic family spending. After a roughly two to three-year period, the debt obligation is satisfied. In exchange, consumers agree to destroy all credit cards and refrain from using additional credit. If a family insists on getting another loan or using a credit card, they are dropped from the program. Modest fees are charged. The client does not sign for a consolidation loan.

Advice for Consumers

Do It Yourself Debt Payment Plans. Some families avoid debt counseling by looking at their options, reducing spending, often negotiating with creditors to reduce payments for a short period, and then applying most of their savings to debt service. With self-discipline many consumers have paid off thousands of dollars in debt with good old-fashioned tight-fisted spending. And in the process have avoided the temptation to sign up for an expensive consolidation loan.

Use the “Rule of 3.” Investigate three consumer credit counseling options. Ask questions. A search of the Yellow Pages and the Internet will reveal your choices. Read carefully. Many agencies have similar names but not the same services.

To Get Started , you might want to read Credit Help for Arkansans: Names and Numbers to Know to learn about some of the consumer credit counseling organizations located in Arkansas . All offer in-person financial counseling and toll-free phone numbers to make the initial contact.

Learn As Much As Possible About the Company. Read the information on the web sites carefully. Ask for written materials on who it is, how long it has been in business and specifically what services are provided before you commit to making any payments. Many traditional consumer credit counseling services are members of the National Foundation for Consumer Credit, a non-profit agency dedicated to helping consumers manage their money and pay down debt.

Do Not Pay Before Service is Received. Ask how much of each monthly payment is going to your creditors. No legitimate counseling agency has hefty up-front or voluntary fees. In the end, “voluntary” fees are usually not voluntary.

Be Aware of the Hard Sell. If the person at the other end of the line is reading from a script and aggressively pushing debt “savings” or the possibility of a future “consolidation' loan, hang up.

Financial Counseling Takes Time. Any agency that offers you a debt management plan in less than 20 minutes has not spent enough time looking at your finances. An effective initial counseling session, whether on the phone or in-person, takes a significant amount of time, generally 60 to 90 minutes. And before the session, you will be expected to spend time to complete several forms about your financial situation.

What Services Do You Need? An agency that offers only debt consolidation is not looking out for your interests. You may benefit from a financial counseling session or two and be motivated to manage your own debt. An agency that offers educational options, such as classes or budget counseling, will more likely have your interests.

How Much Will I Have to Pay? Free initial counseling and debt management plan typical fees for creditable organizations might be - $15 - $25 to set up an account and a $10 - $20 monthly service charge. Sometimes there is a modest charge for additional budget counseling. Legitimate agencies will try to work out an affordable plan. However, keep in mind, when your debts are too high that you can't reasonably make the payments, you won't qualify for a DMP.

How Much Training Do Counselors Have? Members of the National Foundation for Consumer Credit must pass a certification program and participate in ongoing training. Ask if any employees are Accredited Financial Counselors (AFC), a credential that requires a candidate to pass rigorous examinations in personal and family finance and financial counseling skills. Make sure employees are bonded. Ask how the agency maintains confidentiality.

Are Employees Paid by Commission? Most credit counseling agencies that are non-profit are suppose to consider your best interests. An employee who receives a commission is usually more concerned about his or her wallet and not yours.

Do Your Homework. If in doubt, check with the Arkansas attorney general's office (1-800-482-8982) or your Better Business Bureau to see if the credit counseling agency has any complaints registered again the firm. If you run into a problem, contact the Federal Trade Commission or 1-877-FTC-HELP.

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