Credit counseling is a service provided by organizations that offer professional counseling for consumers in need of assistance with debt repayment, debt management, and money management. Also called “debt counseling,” credit counseling is also required before filing chapter 7 or chapter 13.
A credit counseling agency will assist you with managing credit card debt and loans such as personal, mortgage, student, and auto. The agency also assists with utility bills and tax debt. A major benefit to credit counseling is that the credit counselor will handle all lenders, collection agencies, and credit card companies for you. This helps to eliminate the stress associated with phone calls from collection agencies and creditors. Your credit counselor will negotiate a repayment plan with your creditors that will significantly lower your monthly payments and interest rates.
You will have the option to send monthly payments to the credit counseling agency or authorize a monthly electronic funds transfer from your bank account. Depending on the credit counseling agency, they may offer an option called “debt management system.” This means you will pay the agency a lump sum. Out of that lump sum, payments will be made on your behalf. This system can protect you against skipped or late payments, which can save money on interest, fees, and any penalties associated with the debt. An additional benefit to credit counseling is that it can educate you on how to better manage your finances and eventually help minimize or prevent future debt.
While there are many advantages to credit counseling, there are also disadvantages. Credit counseling could have a negative effect on your credit. In some cases lenders, specifically mortgage lenders, may not want to extend credit to an individual that may be in the process of completing a credit counseling program. Fortunately, credit counseling notations are dropped from your credit report one month after the counseling program is complete.
Another disadvantage to credit counseling is the potential for fraud. Most credit counseling agencies are legit, but some are nothing more than a scam. The following signs will let you know that the credit counseling agency you’re dealing with is really a scam:
- -Big upfront fees (legitimate agencies typically charge $10-$15 U.S.)
- -Delayed or missing payments
- -No accreditation
- -Unrealistic promises (“settle for pennies,” or “this won’t affect your credit report”)
To protect yourself against fraudulent credit counseling agencies, make sure the agency is approved by the U.S. Trustee Program of the United States Department of Justice. Locating an approved agency is simple. Just log onto www.usdoj.gov and follow these simple steps:
- -Under “Resources” click “DOJ Agencies”
- -Scroll down to “U.S. Trustees Program”
- -Under “Bankruptcy Reform” click “Credit Counseling & Debtor Education”
- -Under “Credit Counseling for Consumers” click “Approved Credit Counseling Agencies”
The search function allows the user to browse through approved agencies by state. You can also follow this link, which will take you directly to the search page.
