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Should You Seek Help From a Credit Counseling Agency?

  • Matt Bell SoundMindInvesting.com
  • 2012 1 Jan
  • COMMENTS
Should You Seek Help From a Credit Counseling Agency?

I was surprised to read recently that there’s been a strong drop in the number of people turning to credit counseling agencies for help in paying back their debts.  After all, plenty of people are still struggling under the weight of too much debt.  Gail Cunningham, spokesperson for the National Foundation for Credit Counseling, said, “I think some are just tired of trying and have given up.”

There’s no reason to give up.  I know first hand that you can get out of debt.  It may take some time, and it will definitely take some work, but it can be done.

If you’ve tried to deal with your debts on your own and are still struggling, you might be a good candidate for credit counseling.

What Is Credit Counseling?

Among other services, credit counseling agencies offer debt management plans (DMP), in which they negotiate with your creditors on your behalf.  You send the credit counseling agency one check each month, which the office divvies up among your creditors based on the negotiated agreements.

The agencies are funded, in part, by credit card companies, which make “fair share” contributions to the counseling agencies based on a percentage of the amounts the agencies collect on their behalf. So, credit counseling agencies are usually able to work out reasonable payment plans with your creditors.

For credit card debts, they can’t lower your balances, but they can often get late and over-limit fees wiped out and lower your interest rates, usually resulting in a lower monthly payment.  Another benefit is that if you’re being hounded by a collection agency, working with a credit counseling agency can, in effect, call off the dogs.

Watch Out for Bad Credit Counseling Agencies

Be careful in choosing which agency you work with, as the industry has had its share of unscrupulous players. Start by looking for one associated with the National Foundation for Credit Counseling (NFCC). Founded in 1951, the NFCC is the oldest and largest network of community-based, non-profit credit counseling agencies in the nation.

All NFCC counselors are certified credit counselors, and an independent third party accredits all agencies. You can search for a NFCC credit counseling office near you online or by calling 800-388-2227.

Once you find a local office, check with the Better Business Bureau to see if any unresolved complaints have been filed against the office. If you can’t find a credit counseling office near you or prefer not to visit the office in person, some offer their services online or over the phone.

Be sure to get all fee information up front and in writing. Typical debt management plan fees include a one-time set up fee that should be no more than $30 and monthly fees of no more than $20. If your finances are really tight, you may be eligible to work with an agency at no cost, because one of the NFCC’s standards for membership is a willingness to work with people regardless of their ability to pay.

Members of Christian Community Credit Union, which is a sponsor of my work, can receive free credit counseling and other financial education services through a program called Balance.

Not All Debts Qualify for a Debt Management Plan

A debt management plan can only be used with certain unsecured debts, such as credit card and medical debts.  Student loans cannot be renegotiated through credit counseling offices. Whether tax debt can go through a DMP depends on where you live.

The NFCC also has a large number of certified housing counselors who can help you with foreclosure prevention assistance.

Don’t Confuse Debt Management With Debt Settlement

A debt settlement plan sounds similar to a debt management plan, but there’s a world of difference. Whereas a debt management plan will lower your monthly payments, debt settlement companies claim they can help you pay off your debts for pennies on the dollar.

Such companies often advise people to stop making payments to their creditors and to send them the payments instead. The companies say they will save the money until they have enough to make a settlement offer. But there’s no guarantee that a creditor will accept such an offer. Plus, when you stop paying your debts, your balances will grow quickly because the interest and fees continue. In addition, your credit score will likely tank.

Depending on where you live, all those missed payments may prompt creditors to garnish your wages and place liens on your property. Further, if the debt is settled, you may have to pay taxes on the portion of the debt that was forgiven.

My advice? Do not work with debt settlement companies.  However, if you’ve done your best to deal with your debts on your own but are still struggling, do consider a debt management plan through a reputable credit counseling agency.

You should also know that while working with a credit counseling office should not hurt your credit score,it may show up on credit report, and that could hinder your ability to get credit.  But it’s far less damaging to your credit than bankruptcy or foreclosure.

Have you ever worked with a credit counseling agency?  How was your experience?

Matt Bell is the author of three personal finance books published by NavPress, including the brand new "Money & Marriage: A Complete Guide for Engaged and Newly Married Couples."  He teaches a wide variety of workshops at churches, conferences, universities, and other venues throughout the country.  To learn more about his work and subscribe to his blog, go to: www.mattaboutmoney.com.