Fiscal Fitness
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. (If they don't have
complaints about them, it's not a guarantee that they're
legitimate.) Then, it's time for you to 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 be 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 companies that:
- guarantee they can remove your unsecured debt
- promise that unsecured debts can be paid off with
pennies on the dollar
- claim that using their system will let you avoid
bankruptcy
- 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.
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