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Choosing a Credit Counselor
Living paycheck to paycheck? Worried about debt collectors? Can’t
seem to develop a workable budget, let alone save money for retirement? If this sounds familiar, you may want to consider the services of a credit counselor. Many
credit counseling organizations are nonprofit and work with you to solve your financial problems. But beware — just because an organization says it is “nonprofit”
doesn’t guarantee that its services are free or affordable, or that its services are legitimate. In fact, some credit counseling organizations charge high fees,
some of which may be hidden, or urge consumers to make “voluntary” contributions that cause them to fall deeper into debt.
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.
Choosing a Credit Counseling Organization
Reputable credit counseling organizations advise you on managing your money and debts, help you develop a budget, and usually offer free educational materials and
workshops. Their counselors are certified and trained in the areas of consumer credit, money and debt management, and budgeting. Counselors discuss your entire
financial situation with you, and help you develop a personalized plan to solve your money problems. An initial counseling session typically lasts an hour, with
an offer of follow-up sessions.
A reputable credit counseling agency should send you free information about
itself and the services it provides without requiring you to provide any details about your situation. If a firm doesn’t do that, consider it a red flag and go
elsewhere for help.
Once you’ve developed a list of potential counseling agencies, check them
out with your state Attorney General, local consumer protection agency, and Better Business Bureau. They can tell you if consumers have filed complaints about them.
(But even if there are no complaints about them, it’s not a guarantee that they’re legitimate.) The United States Trustee Program also keeps a list of credit counseling
agencies that have been approved to provide pre-bankruptcy counseling. After you’ve done your background investigation, it’s time for the most important research
— you should interview the final “candidates.”
Questions to Ask
Here are some questions to ask to help you find the best counselor for you.
- What services do you offer? Look for an organization that offers a range
of services, including budget counseling, and savings and debt management classes. Avoid organizations that push a debt management plan (DMP) as your only option
before they spend a significant amount of time analyzing your financial situation.
- Do you offer information? Are educational materials available for free?
Avoid organizations that charge for information.
- In addition to helping me solve my immediate problem, will you help me
develop a plan for avoiding problems in the future?
- What are your fees? Are there set-up and/or monthly fees? Get a specific
price quote in writing.
- What if I can’t afford to pay your fees or make contributions? If an organization
won’t help you because you can’t afford to pay, look elsewhere for help.
- Will I have a formal written agreement or contract with you? Don’t sign
anything without reading it first. Make sure all verbal promises are in writing.
- Are you licensed to offer your services in my state?
- What are the qualifications of your counselors? Are they accredited or
certified by an outside organization? If so, by whom? If not, how are they trained? Try to use an organization whose counselors are trained by a non-affiliated
party.
- What assurance do I have that information about me (including my address,
phone number, and financial information) will be kept confidential and secure?
- How are your employees compensated? Are they paid more if I sign up for
certain services, if I pay a fee, or if I make a contribution to your organization? If the answer is yes, consider it a red flag and go elsewhere for help.
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. A DMP alone is not credit counseling, and DMPs are not for everyone. Consider signing on 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 will help you create a budget and teach you money management skills.
How a DMP Works
You deposit money each month with the credit counseling organization. The organization uses your deposits to pay your unsecured debts, like 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
and waive certain fees, but check with all your creditors to be sure that 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 longer to complete. Ask the credit counselor to estimate how long it will take for
you to complete the plan. You also may have to agree not to apply for — or use — any additional credit while you’re participating in the plan.
Is a DMP Right For You?
In addition to the questions already listed, here are some other important ones to ask if you’re considering enrolling in a DMP.
- Is a DMP the only option you can give me? Will you provide me with on-going
budgeting advice, regardless of whether I enroll in a DMP? If an organization offers only DMPs, find another credit counseling organization that also will help
you create a budget and teach you money management skills.
- How does your DMP work? How will you make sure that all my creditors will
be paid by the applicable due dates and in the correct billing cycle? If a DMP is appropriate, sign up for one that allows all your creditors to be paid before
your payment due dates and within the correct billing cycle.
- How is the amount of my payment determined? What if the amount is more
than I can afford? Don’t sign up for a DMP if you can’t afford the monthly payment.
- How often can I get status reports on my accounts? Can I get access to
my accounts online or by phone? Make sure that the organization you sign up with is willing to provide regular, detailed statements about your account.
- Can you get my creditors to lower or eliminate interest and finance charges,
or waive late fees? If yes, contact your creditors to verify this, and ask them how long you have to be on the plan before the benefits kick in.
- What debts aren’t included in the DMP? This is important because you’ll
have to pay those bills on your own.
- Do I have to make any payments to my creditors before they will accept
the proposed payment plan? Some creditors require a payment to the credit counselor before accepting you into a DMP. If a credit counselor tells you this is so,
call your creditors to verify this information before you send money to the credit counseling agency.
- How will enrolling in a DMP affect my credit? Beware of any organization
that tells you it can remove accurate negative information from your credit report. Legally, it can’t be done. Accurate negative information may stay on your credit
report for up to seven years.
- Can you get my creditors to “re-age” my accounts — that is, to make my
accounts current? If so, how many payments will I have to make before my creditors will do so? Even if your accounts are “re-aged,” negative information from past
delinquencies or late payments will remain on your credit report.
How to Make a DMP Work for You
The following steps will help you benefit from a DMP, and avoid falling further into debt.
- Continue to pay your bills until the plan has been approved by your creditors.
If you stop making payments before your creditors have accepted you into a plan, you’ll face late fees, penalties, and negative entries on your credit report.
- Contact your creditors and confirm that they have accepted the proposed
plan before you send any payments to the credit counseling organization for your DMP.
- Make sure the organization’s payment schedule allows your debts to be
paid before they are due each month. Paying on time will help you avoid late fees and penalties. Call each of your creditors on the first of every month to make
sure the agency has paid them on time.
- Review monthly statements from your creditors to make sure they have received
your payments.
- If your debt management plan depends on your creditors agreeing to lower
or eliminate interest and finance charges, or waive late fees, make sure these concessions are reflected on your statements.
Debt Negotiation Programs
Debt negotiation is not the same thing as credit counseling or a DMP. It can be very risky and have a long term negative impact on your credit report and, in turn,
your ability to get credit. That’s why many states have laws regulating debt negotiation companies and the services they offer.
The Claims
Debt negotiation firms may claim they’re nonprofit. They also may claim that they can arrange for your unsecured debt — typically, credit card debt — to be paid
off for anywhere from 10 to 50 percent of the balance owed. For example, if you owe $10,000 on a credit card, a debt negotiation firm may claim it can arrange for
you to pay off the debt with a lesser amount, say $4,000.
The firms often pitch their services as an alternative to bankruptcy. They
may claim that using their services will have little or no negative impact on your ability to get credit in the future, or that any negative information can be
removed from your credit report when you complete the debt negotiation program. The firms usually tell you to stop making payments to your creditors and instead,
send your payments to the debt negotiation company. The firms may promise to hold your funds in a special account and pay the creditors on your behalf.
The Truth
Just because a debt negotiation company describes itself as a “nonprofit” organization, there’s no guarantee that the services they offer are legitimate. There
also is no guarantee that a creditor will accept partial payment of a legitimate debt. In fact, if you stop making payments on a credit card, late fees and interest
usually are added to the debt each month. If you exceed your credit limit, additional fees and charges also can be added. All this can quickly cause a consumer’s
original debt to double or triple. What’s more, most debt negotiation companies charge consumers substantial fees for their services, including a fee to establish
the account with the debt negotiator, a monthly service fee, and a final fee of a percentage of the money you’ve supposedly saved.
While creditors have no obligation to agree to negotiate the amount a consumer
owes, they have a legal obligation to provide accurate information to the credit reporting agencies, including your failure to make monthly payments. That can result
in a negative entry on your credit report. And in certain situations, creditors may have the right to sue you to recover the money you owe. In some instances, when
creditors win a lawsuit, they have the right to garnish your wages or put a lien on your home. Finally, the Internal Revenue Service may consider any amount of
forgiven debt to be taxable income.
Tip-offs to Rip-offs
Steer clear of debt negotiation companies that:
- guarantee they can remove your unsecured debt
- promise that unsecured debts can be paid off with pennies on the dollar
- require substantial monthly service fees
- demand payment of a percentage of savings
- tell you to stop making payments to or communicating with your creditors
- require you to make monthly payments to them, rather than with your creditor
- claim that creditors never sue consumers for non-payment of unsecured
debt
- promise that using their system will have no negative impact on your credit
report
- claim that they can remove accurate negative information from your credit
report.
If you decide to work with a debt negotiation company, be sure to check it
out with your state Attorney General, local consumer protection agency, and the Better Business Bureau. They can tell you if any consumer complaints are on file
about the firm you’re considering doing business with. Also, ask your state Attorney General if the company is required to be licensed to work in your state and,
if so, whether it is.
For More Information
The FTC works for the consumer to prevent fraudulent, deceptive
and unfair business practices in the marketplace and to provide information to help consumers spot, stop and avoid them. To file a complaint or to get free information
on consumer issues, visit www.ftc.gov or call toll-free, 1-877-FTC-HELP (1-877-382-4357); TTY: 1-866-653-4261. The FTC enters Internet,
telemarketing, identity theft and other fraud-related complaints into Consumer Sentinel, a secure, online database available to hundreds of civil and criminal law
enforcement agencies in the U.S. and abroad.
December 2005
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