Debt Counseling

Background Information

"Debt Management" - an umbrella name for a large group of debt-environment functions and activities such as debt reduction, consolidation, negotiation, settlement, bankruptcy, credit repair clinics, and even deciphering credit reports. When contacting an agency, find out which functions they perform.

Credit Repair Clinics - Most notable consumer groups for debt management issues advocate avoiding credit repair clinics. Many of these clinics are illegal. But the bottom line even for the legal operations is, none of them can do anything for you that you can't do for yourself... except charge you $250 to $5000 for unnecessary services.

Deciphering Credit Reports - Credit reports can be intimidating but if taken slowly with the use of materials sent with your report you will get through it. Correcting your own report is strongly recommended but to do so you are going to have to understand it. To understand it, you must simply roll your sleeves up and get intimate with it. Ask questions on this sites forum or of legitimate on-profit debt counselors.

Frequently Asked Questions

Is a debt counseling service a negative on your credit report?

Counselling services rarely report to the credit bureau, however creditors sometimes indicate use of such a service which does not help your report. However, not using a debt counseling service and filing bankruptcy or even having late payments is far worse. Therefore, when in credit trouble, the net affect of using credit counseling is nil.

When is bankruptcy the best course of action?

In theory, bankruptcy is to be used by people who are absolutely unable to repay their debts and a debt counselor has no means of assisting. At these times the individual should ask themselves, "is this a permanent or temporary problem?" For example, though both scenarios can be devastating, permanent disability may be far different than job loss. One may require bankruptcy and the other negotiating with creditors.

If a company is filed as non-profit, isn't that good enough?

All Non-Profit groups must have a Federal 501-C3 non-profit status form on file. However the consumer should never use this filing as the only qualification to act in accordance with a true "non-profit" in this industry. Many so called "non-profit" debt managers advertise this status to the unweary consumer but are as non-profit as Donald Trump... but oh, how good it looks in advertising print.

Can you give me an example?

A legitimate non-profit will not retain a first payment but rather are paid a "fair share distribution" (around 10%) by the creditors plus about $5 - $20 per debt monthly from the client. At times this contribution is negotiable. I will also add that with what a legitimate debt manager is suppose to do for it's client, it could not be done for much less and still be done correctly.

What are pitfalls to avoid in selecting a "non-profit" group?

Many so called non-profit agencies in addition to a high per-debt monthly fee will also charge a one time fee equal to a first month's payment on all debts considered. The total of the debts may even be inflated because unscrupulous agents include bills which should not be included. Not only is it inflated but the lure is that this fee is a "retainer" paid back to the client when the program is successfully completed. The sad fact is, these groups know that only a small percent who go to these groups ever finish their program. Therefore these managers keep the "retainer"... a very lucrative practice for a "non-profit" business.

Which payments or creditors should not be included?

Not all debts should be listed because many are non-negotiable. For example, student loans, payments to I.R.S., selected Credit Union loans, many department store accounts, foreign creditors, and many others cannot be negotiated and debt counselors should know this. A less than scrupulous agency wants non-negotiable items included because it inflates the retainer or first payment which a true non-profit would not be taking in the first place. At a later time the agency would then inform the client that the creditor has since changed policy and nothing can be done about it. Of course, the agency will keep the retainer anyway because they can't be held responsible for a "change of the creditor's policy".

Is one debt counselor better than another?

In hardship cases where it is necessary to try to lower the interest rate for the client, there is no difference from what one debt manager can do versus another because all lower rates are preset by the industry and creditor and not established by debt managers. On the other hand, with so many clients on board with less scrupulous groups, agencies can't keep up with the follow up that is required. For example, when a proposal to lower an interest rate is sent out in one legitimate agency I know, it follows up in 21 days because they know that 30% of all proposals are lost by the creditors themselves. I must assume it must happen to most companies since they are all going to the same creditors.

What exactly should a debt counselor do... what steps are involved concerning my debts?

Each debt proposal must be initiated with contact, followed up, often re-initiated if the creditor looses it, and followed up again. Proposals can take up to 6 months to actually get all of the accounts accepted. Most quasi "non-profits" don't mind it taking even longer because it is a greater incentive for the client to drop out and thus loose their retainer. Thus proper follow-up by many "so called" non-profit groups is minimum at best and often non-existent.

So is there a difference between a non-legitimate "non-profit" and a "for-profit"?

Do not confuse a less than legitimate "non-profit" with a legitimate "for-profit" group. The former is to be avoided but the latter may well be part of what you need. Consumers that need help but want to maintain their credit worthiness is what a good "for-profit" group specializes in. A good "for-profit" agency that brings on the new client has to have extensive knowledge of what each and every creditor does and does not offer. Many so called counselors offer nothing more than heavy telemarketing at best.

Can you offer an example of someone in need of a "for-profit" agency and are their fees similar to legitimate "non-profit"?

A good "for-profit" group could probably do a great deal for the 2-income family where one partner looses their job and the family begins living off of credit cards. The agency could probably get the family out of debt in 4-5 years with no damage to their credit history. On the other hand, if the family could not meet monthly payments, the agency could not accomplish this and they would recommend a non-profit group to help.

Are legitimate "for-profit" fees similar to legitimate "non-profit"?

Because such a group is NOT "non-profit" it does not receive a "fair share distribution" from creditors. Therefore, it does charge a non-refundable fee equal to a one month payment but only of legitimate debts as discussed above. There is also usually a flat fee per creditor per month. But the bottom line is that these fees will be far less than those charged by many so-called "non-profit" groups as illustrated above and you can be assured that your debts will be managed by professionals.

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