Credit Counseling & Debt Management Plans

Credit counseling agencies are mostly non-profit. Their primary purposes are to educate consumers about money management and to negotiate debt repayment. Counseling agencies can be a valuable resource in helping you prepare a budget to determine if you have enough income to service your debt, or if you ought to consider filing bankruptcy.

Bankruptcy - Credit Counseling 2

A reputable credit counseling agency should not hesitate to recommend that you file a bankruptcy petition if it sees that that is what is in your best interest. You are required by federal law to take a credit counseling course prior to filing for bankruptcy. To satisfy the requirements of the law, the course you take must be from an agency approved by the United States Department of Justice, so it is best to make sure the credit counseling agency you deal with is an approved provider in the event that you do choose to file for bankruptcy relief.

If the credit counseling agency feels that you have enough income to repay your debts, they will typically recommend that you enter a debt management plan (also known as a debt consolidation plan). Most credit counseling agencies have agreements in place with creditors and collection agencies to accept a lower monthly payment or a lower interest rate on your debt, so you should be able to reduce your overall monthly payment and have a lower interest rate overall. You will typically have to pay 100% of the debt back under these plans, so it is important that you have enough extra money each month to be able to afford the plan for its entire term. Unfortunately, a large percentage of people who enter into debt consolidation plans are unable to complete the program and, because monies paid into a debt consolidated plan cannot be recovered, end up in a worse financial situation than they were in before entering into the plan.

Creditors Still Retain Right to Collect on You

Debt consolidation plans usually take 2-5 years to complete, depending on the amount of debt and budget. Your creditors will usually close all of your accounts while you are in the debt consolidation program, and even though the creditors have agreed to a consolidation plan, you are still considered to be in default of the original terms of your agreement with the creditor. That default will have a negative effect on your credit report. It is also quite possible that creditors who have not agreed to be a part of the debt consolidation plan will sue you in an attempt to garnish your wages or place liens on your assets.

Like debt negotiation programs, creditors’ incentive for agreeing to reduce interest rates or waive default penalties is the idea that getting something is better than getting nothing. Creditors know that they probably will not be entitled to anything if you file for bankruptcy.

There are many advantages to consulting with a reputable credit counseling agency, and a good debt consolidation plan can help you pay off your debt if your budget allows. As with all the alternatives mentioned here, it is extremely important that you find a reputable company with reasonable setup or monthly maintenance fees to help you.

Comparing Debt Consolidation to Bankruptcy

Although a Chapter 13 bankruptcy may seem similar to a debt consolidation plan, it is actually quite different. In a Chapter 13 bankruptcy, the court will require almost all creditors to accept the Chapter 13 repayment plan, and the court tells – not asks – those creditors how much of their debt will be repaid. The provisions of the bankruptcy code give a significant amount of protection to anyone who files a bankruptcy petition, and a Chapter 13 bankruptcy can be considered to be like a debt consolidation plan, but “with teeth.”

A Chapter 7 bankruptcy will likely result in a discharge all of your unsecured debt, none of which you will be required to pay back. Any money you earn following a Chapter 7 bankruptcy can go towards savings or your other financial goals, but it’s unlikely you will have extra money available should you participate in a debt consolidation program.

The Pros and Cons of Credit Counseling

Pros
One Monthly Payment
You only have to make one monthly payment to the credit counseling agency, and they will disburse the money to the creditors on your behalf.
Low Monthly Payments
With negotiated lower interest rates and your fees waived, you may have a lower monthly debt consolidation payment than the amount you currently pay each month to your individual creditors.
Stops Creditor Harassment
Creditors that choose to enroll in the debt management plan will usually stop calling you while you remain in the program.
Counseling Available
Credit counselors and debt management firms often provide useful financial counseling and other educational programs.
Cons:
Low Success Rates
Most people find themselves in debt because of a drastic change in life circumstances that results in an unexpected reduction of income. These people simply can’t afford to pay back 100% of their debt, even if it is interest free. For those people, it is nearly impossible to keep up on payments under a debt consolidation plan.
Not Available for All Types of Debts
Debt consolidation plans vary, but many do not include mortgages in arrears, auto loan deficiencies, student loans, or tax debts.
Loss of Control
Once you enter into a debt consolidation plan, your money will be out of your control and in the hands of a debt consolidation firm. You must count on that firm to make timely payments to the appropriate creditors.
Your Credit Accounts Will Be Cancelled
You will be unable to use the credit cards issued by creditors who are enrolled in the program.

Consider Credit Counseling or a Debt Management Plan If…

  • You want help creating a financial roadmap or want to gain a better understanding of your personal finances
  • You have high interest rates and your balance never seems to go down
  • You have a steady and reliable source of income, and your budget shows enough disposable income to afford monthly debt consolidation payments, or
  • You have higher credit card bills than you can manage.
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