What is Credit Counseling?
For consumers who have dug themselves into a deep financial hole, there are multiple options for relief. Oftentimes, the first thought is that you must file bankruptcy. While this is a valid option, it shouldn’t be your first choice. Instead, why not consider visiting a non-profit credit counseling center for help? After all, the credit counseling course is mandatory in bankruptcy anyway, provided you take one from an approved agency.
When you begin researching credit counseling agencies, it is essential that you find agencies that are approved by your state’s attorney general. They keep lists of consumer complaints about all agencies, though this does not necessarily mean they are legitimate. You should also check with The United States Trustee Program as they keep a list of approved credit counseling agencies After you’ve completed your research, contact the agencies you are considering and “interview” them.
Here we will discuss who should consider credit counseling, what you need to do before an appointment, what happens at the appointment, counseling vs debt management, and pre-bankruptcy counseling.
Who Needs Credit Counseling
How do you determine if you need credit counseling? Generally speaking, if you are living paycheck to paycheck, with no savings, have late payments on several obligations, and can’t figure out how to make it to the next paycheck, credit counseling is probably the best choice for you.
When you have reached the point that creditors are calling and harassing you about missed or late payments, credit counseling would be an excellent idea.
If you are a hairsbreadth away from losing your home to foreclosure or having your vehicle repossessed, credit counseling can help you made the right decisions for your financial future.
Begin by gathering all your bill statements, bank statements, paycheck stubs, and making notes about other debt or income. Then, do the math. If your expenses are more than your income, you have a problem. How far behind are you falling each month? Are there expenses you can cut that aren’t critical to living?
For example, do you really need to pay $4 for Starbucks every day when you could make coffee at home? Or, how many times a week are you eating out? Is it necessary or is it just a convenience? What other indulgences are costing you money you don’t need to spend?
Once you review everything, and realize the changes you can make won’t help your financial situation, it’s time to look for a credit counselor.
Preparing Before the Appointment
Once you have an appointment set, you need to start gathering documents. Start with everything you reviewed to determine your financial situation. Then, Consumer Education Services recommends the following to get the most out of your counseling appointment:
Statements of Your Debts
- credit card debts
- personal loans
- hospital bills
- home mortgages
- auto loans
- student loans
Only by having a full picture of your debts can a credit counselor give you accurate and helpful advice about how to manage your debt.
Statements of Your Income and Assets
- proof of your income
- tax returns
- recent pay stubs
- statements of your assets (bank accounts, investment accounts, and property you own)
Income and assets are also essential for the credit counselor to help you determine how best to set up a plan to pay off debt while maintaining your cost of living. It is truly a balancing act.
Records of Expenses
- rent or mortgage
- routine medical expenses
- other monthly bills (cell phones, internet, cable, etc.)
This information lets your credit counselor calculate how much of your monthly income should be accessible for spending and how much could be assigned to paying off debts.
Don’t Withhold Information
If you don’t provide everything to your credit counselor, he or she can’t make a good plan for your financial situation. For instance, if you don’t disclose that you have a second job that pays a certain amount each month, the credit counselor could make recommendations, such as debt management, when it isn’t necessary.
Only with every piece of financial information can the credit counselor give you the best possible advice during your appointment.
There are certain questions you should ask prior to making an appointment. The Federal Trade Commission recommends that you ask the following:
What services do you offer? Avoid organizations that push a debt management plan (DMP) as your only option
Do you offer information? Do they offer free educational materials? Avoid groups that charge for information.
Will you help me develop a plan for avoiding problems in the future? A legitimate counselor will not just help you with current problems, but also give you advice for long-term financial security.
What are your fees? Get a specific quote in writing.
What if I can’t afford to pay your fees or make contributions? Legitimate credit counseling agencies will not charge you if you can’t afford fees.
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? Credit counselors for truly non-profit agencies will be licensed and certified.
What are the qualifications of your counselors? 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? Find out what security the agency offers in terms of digital information.
How are your employees paid? Do they get commissions if I sign up for certain services? If the answer is yes, go elsewhere.
When you are ready to go to your appointment, be prepared to spend 45 minutes to an hour with your counselor. He or she will fully review your financial situation, offer you advice on what expenses to cut, how to put together a budget, and how best to use the income you have to not only keep up on your current payments, but how to pay down debt at the same time.
Some agencies will take the path of strictly offering budgeting advice and how to work with your creditors to lower interest rates for making more headway on your debt. But, sometimes a Debt Management Plan (DMP) is really the best choice for you.
Counseling vs Debt Management Plans
Credit counseling is generally about examining your financial situation, accepting you need to work on it, creating a budget, and having a counselor who can hold you accountable for your debt reduction strategy.
Debt Management Plans are more about combining your debts into a single payment that runs through the credit counseling agency. In a DMP, you pay a certain amount each month to the credit counseling agency. The agency then uses the money to pay your unsecured debts (credit card bills, student loans, medical bills), according to a payment schedule you and your creditors worked out.
Some creditors may lower your interest rates or waive some fees. And while you should be able to trust your credit counselor, it’s a good idea to contact your creditors to ensure they agree to the concessions that a credit counselor has mentioned. This is just about protecting yourself.
If you want a successful DMP, you have to make regular, on-time payments to the agency. However, be prepared - it could take 48 months or more to finalize your DMP. Ask your credit counselor for an estimate on how long it will take for you to finish the plan. Most plans require that you not apply for — or use — any additional credit while you’re on the DMP.
Before you agree to take on a DMP, there are questions that The Federal Trade Commission suggests you ask:
Is a DMP the only option you can give me? Find out if the agency will offer on-going budgeting advice and teach you money management skills instead of the DMP.
How does your DMP work? If a DMP is what you choose, make sure the plan allows all your creditors to be paid in advance of your payment due dates within the billing cycle.
How is the amount of my payment determined? Don’t sign up for a DMP if you can’t afford the monthly payment. Any agency that pushes you hard is looking to make money, and you should go elsewhere for help.
How often can I get status reports? Can I access my accounts online or by phone? Ask that the organization you sign up with provide regular, detailed statements about your management plan.
Can you get my creditors to lower or eliminate interest and finance charges, or waive late fees? If you are promised this perk, contact your creditors to verify this.
What debts aren’t included in the DMP? There will always be bills that you still need to pay on your own. Do I have to make any payments to my creditors before they will accept the proposed payment plan? Some creditors require you to make a payment to the counseling agency before approving your DMP. If a credit counselor tells you this, call your creditors to verify before sending money to the counseling agency.
How will enrolling in a DMP affect my credit? Negative information will remain on your credit report. Legally, credit counselors cannot remove negative reports on your credit report.
Can you get my creditors to “re-age” my accounts — that is, to bring my accounts current? If this is offered, find out how many payments you have to make before creditors will do it. But, even with “re-aging”, past delinquencies or late payments will stay on your credit report.
If regular counseling isn’t enough and a DMP isn’t an option, you may have to move on to filing bankruptcy. This is an incredibly useful tool, but it does require pre-bankruptcy credit counseling.
Credit Counseling Pre-Bankruptcy
Pre-bankruptcy credit counseling is required in all 50 states. After you complete the course – and most are available online - you’ll receive a certificate of completion that needs to be filed along with your bankruptcy paperwork (within 15 days of your bankruptcy filing date).
To receive a credit counseling certificate, you must complete two courses (one pre-bankruptcy and one just before the bankruptcy is discharged) from a debt relief agency that is approved by the Department of Justice. The course requirements are outlined within two provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which requires that any person filing for bankruptcy complete financial counseling and debtor education.
The first credit counseling certificate can be earned by enrolling in a 60- to 90-minute pre-bankruptcy counseling session online. The cost is typically $50, but counseling agencies must offer pre-bankruptcy credit counseling for free if you can’t afford it. The credit counseling certificate you earn will be valid for six months, giving you the opportunity to decide if you want to proceed with a bankruptcy.
If you decide to move forward with bankruptcy, you must complete the online session. Before you begin the session, make sure you have all of your financial information available:
- Income statements (paystubs, Social Security payments, spousal support, child support)
- List of expenses (including your mortgage or rent payments, groceries, car insurance, homeowner’s/renter’s insurance, utilities, childcare, regular medical expenses, transportation, etc.)
- Debts you owe (credit cards, student loans, personal loans, auto loans, etc.)
For each debt, you must provide the total amount you owe, the interest rate (either fixed or APR), monthly payments (minimums), the account number, and whether or not anyone else is on the account.
As you proceed through the course, you will be offered guidance on budgeting, lowering your monthly expenses, and other courses of action that may be preferable to filing bankruptcy. A Chapter 7 bankruptcy (less common) takes around 6-12 months. Chapter 13 (more common and known as bankruptcy reorganization) can take years. It’s important that you determine the course of action that works best for your situation. CC Advising offers the pre-bankruptcy counseling at ccadvising.com.
For families in dire financial straits, credit counseling can be a saving grace. It’s an opportunity to learn how to properly budget your income to cover your expenses, learn how to avoid getting into more debt, and how to cut back on unnecessary expenses. You can learn about debt management plans and how bankruptcy may or may not be a good idea for you.
The most important thing to remember is that credit counseling is about solving your existing financial problems and avoiding new ones in the future.
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