What is Credit Counseling?
When you're struggling to dig out from under a mountain of debt, you could benefit from the wisdom and guidance of an organization that has helped others who have been in a similar situation.
Credit counselors work with consumers to educate them about money, to develop household budgets and to come up with a plan to eliminate debt. These agencies can move in a wide range of directions, depending on your situation, from simply offering guidance to negotiating with creditors to resolve debt that is beyond your ability to pay. Individuals filing Chapter 13 bankruptcy are required to receive counseling.
About Counseling Organizations
These organizations typically have a wealth of information about money and debt. Information should be available free of charge and the organization should provide a document, brochure or link to a description of the range of services offered.
The counseling agency is typically part of an accreditation group, such as the National Foundation for Credit Counseling (NFCC) or the Association of Independent Consumer Credit Counseling Agencies (AICCA). Their counselors are trained in budgeting, debt management, spending habits and financial education. They should also be well-versed in collections, consumer rights and responsibilities and bankruptcy.
Client meetings are considered confidential - and the client's privacy is of the utmost importance. While they will work with clients to identify the best path to restoring their financial health, they cannot dispense legal advice.
The credit/lending industry created credit counseling in the 1960s to help consumers find a way to pay their debts rather than avoid them by filing for bankruptcy. Most of the agencies providing the service were part of the NFCC, a consortium of non-profits that primarily provided financial advice via face-to-face meetings in several hundred offices scattered around the United States.
Clients would be taught money management skills and receive a personal plan for solving their financial woes. Plans could range from simple budgets to filing for bankruptcy. One of the most popular options was the debt management plan (DMP). If a consumer agreed to the plan, the agency would contact unsecured creditors and try to negotiate lower interest rates, monthly payments and fees. Once the plan was in place, the consumer would be asked to make a single, consolidated payment to the agency, which would then disburse the money to the creditors.
The nature of the business has changed in the 1990s. Credit card debt was on the rise and many new organizations entered the business. Rather than being the community-based face-to-face groups that had dominated the space, the majority of new companies were national organizations that relied on the internet and telephone communications to deal with clients. For-profit firms became increasingly common.
Funding of Non-profits
Non-profit organizations typically derive their funding from fees paid by clients, grants from the credit/lending industry and a percentage of the payments made by debtors - known as "fair share" payments. Up to 15 percent of what is collected can be returned to the agency. Under Internal Revenue Service guidelines, a non-profit agency may only collect up to 50 percent of its revenue from those payments.
Finding the Right Agency
To find a local agency that you would like to meet with in person, start by making a list of all the ones in your area. Lists of member agencies are available from both the NFCC or the AICCCA. Once you have a list together, you can contact either your state attorney general or local consumer protection office to find out whether there have been many complaints filed. In addition, because of the requirement that applicants for Chapter 13 bankruptcy must receive counseling, the United States Trustee Program maintains its own list of agencies.
Picking a Counselor
It's important to know who you are dealing with as well as the terms of whatever agreement you will have with the organization. This includes getting in writing how much the fees will be, whether the agency is licensed to work in your state, what training the counselors have and whether employees are paid a salary or earn more depending on what services the clients receive. If they receive bonuses for signing up clients for various programs, that would be a red flag.
Likewise, it is important to know if an agency is willing to work with all of your creditors rather than just those who will be paying the agency for its role. An agency should help you deal with all of your debts, no matter how much you have. Most agencies will even provide services to those who simply want to learn more about budget and household finance.
Legitimate agencies will offer multiple options for debt relief, not just a debt management plan. While these plans can be the right solution, they should not be the only ones available.Other options may include debt consolidation or debt settlement. If a debt management plan is used, the client should find out when payments are collected and when they are disbursed. There are numerous examples of consumers finding out later that their first payment was considered a "donation" to the organization rather than being applied to the debt.
Most agencies will offer an initial meeting at no charge that typically lasts about one hour, at which a counselor will ask key questions about the consumer's financial situation and a discussion will take place about the potential options. This is the opportunity for a potential client to decide whether they feel comfortable with the agency and are ready to move forward.
The typical fee structure is simple. If the client signs up, he or she will pay an initiation fee followed by a monthly maintenance fee. As an example, one Massachusetts based company (which regularly discloses its success rates and fees as part of an ongoing accountability project) reported that its clients paid an average of $32.87 for their initial fee and an average of $24.97 monthly.
Members of the AICCCA must agree to cap the initial charge at $75 and the monthly maintenance fees at $50. The NFCC suggests fees should be no more than $50 for a set-up and $25 monthly thereafter.
During the appointments, the focus is on finances. While discussing money can be intensely personal, clients must be prepared to disclose all aspects of their financial lives. A complete financial picture is needed to develop the best strategy for success.
Income, household expenses, existing debt and spending habits will all be discussed. Copies of financial statements - including the debt accounts - will be needed as well.
Prior to coming up with a plan, it is vital to have a clear picture of all the money that is available - expected income as well as all expenses.
The goal of the sessions is to develop a unique plan to address specific client's needs, whether a debt management plan, improved budgeting, bankruptcy, or a combination of these.
All clients are provided with tools to help them manage their finances, including budgeting software and educational materials. Many programs will require their clients to close their credit card accounts while they are working to reduce their debts.
In addition to helping control and retire debts, the firm should also be able to help clients develop plans for savings, building a retirement nest egg, establishing a college fund and other important financial concerns.