One of the unintended results of the recent FTC regulation changes is that many of the television and radio ads now are for credit counseling, even though there are a number of debt relief programs available to consumers. The most important tip, therefore, is don’t let advertising sway your decision. Instead, research all of your options to see which one fits your particular financial situation, because each has pros and cons.
For example, debt settlement can be the best solution for many consumers, despite the well-deserved criticism of many unethical debt settlement companies by the FTC, BBB, and others. For other consumers bankruptcy might be the only option left.
The point is, researching which debt relief solution is right for your specific situation will help ensure that you get out of debt in the best financial shape and don’t get scammed out of your money, which is exactly what the tips below will help you to do.
- Tips for before, during and after you enlist the help of credit counselors.
- Checklist of what to look out for when you’re credit counseling.
- Discover what you need to know about a DMP agreement.
Tip #1 – Watch Out for New Non-Profit Credit Counselors
Because non-profit credit counselors are exempt from the TSR and its limitations on advertising and fees, there is an incentive for debt relief providers to incorporate their company as a 503(3)(c) (non-profit) organization. If an agency is an unethical for-profit company, chances are it will be an unethical non-profit as well.
While some of these companies are changing their business model to non-profit, others are registering without being a non-profit at all. According to the FTC, a number of companies have fraudulently claimed to be federal tax-exempt organizations. They recommend that you thoroughly investigate any prospective credit counseling agency. Consider asking these questions of the agency representative:
- What are the services the company offers to consumers? Many legitimate non-profit organizations will provide a range of consumer services, including budgetary advice, financial training, and debt management instruction. You should avoid any organization that recommends a debt management plan (DMP) before taking the time to analyze your economic situation.
- Does it offer free information? Although it is not legally required, most legitimate non-profit credit counseling agencies provide free educational resources. If the agency wants to charge for information, beware.
- What are the fees charged? Have the agency provide a written quote of all fees.
- Will the agency help if you cannot afford the fees or a voluntary contribution? Any organization that refuses to help you unless you pay their full fees or work with you on payments should be avoided.
- Does the agency provide a legal contract documenting the agreement? They should, and you should read it carefully before signing. Check that all verbal promises are confirmed in the contract.
- Is the agency licensed or certified, if required, to provide credit counseling services in the state? If they are not, find another agency.
- What qualifications must the agency’s counselors meet? Ideally, counselors will be certified or accredited under a recognized professional program. Look for an agency whose counselors are trained by a non-affiliated educator or institute.
- How are its employees compensated for managing your account? Avoid companies that compensate more based on how many services you agree to or the total fees and contributions you pay./li>
Tip #2 – Consider a DIY Debt Management Plan if You’re Disciplined
Most credit counseling agencies offer many very useful free services. However, when considering whether to accept their fee-based services, investigate whether you can accomplish the same thing without their help.
For example, the primary benefit provided by credit counselors is assisting you in negotiating lower debt payments with your creditors. If you can accurately document your inability to afford current payments, with a little self-education and research, you may be able to negotiate with creditors directly.
The agency typically wants you to send it one lump sum payment each month, ostensibly to make it easier for you, and it will distribute the funds to each creditor. However, they may charge a small fee per creditor for that service. Unless you lack the self-discipline to make timely payments, this service may not be worth the fee charged.
However, you should still consider that a good credit counseling agency offers moral support and keeps you accountable which can make give it an advantage over DIY debt management.
Tip #3 – Fully Understand the Debt Management Plan Before Signing
The FTC recommends that you completely understand the DMP before signing. Again, this sounds obvious. But the fact is, there are so many details in a DMP, many people overlook a couple and don’t get a full picture of what they are taking on. There are many items on which you need a full understanding to ensure your best chance for success.
- Ask the counselor to explain the DMP process. It should ensure that your creditors are paid by the payment due dates for that billing cycle.
- How is your monthly payment calculated? Understand the breakdown of fees and payments.
- How can you review the status of your accounts? Does the agency provide online access to real time account information, or do they mail out monthly statements? The agency should be willing to share detailed account information with you.
- Will the agency negotiate to lower or eliminate interest rates and other fees? If so, confirm that in writing with your creditors before signing the DMP. You should also confirm that there is not a long waiting period before those benefits start.
- Confirm which debts will not be covered by the DMP. This is a critical question, because you will still be responsible for making those payments in addition to the DMP monthly payment. In general, only unsecured debt, such as credit cards, can be managed through a DMP. Be sure you can pay all monthly bills due, not only the DMP payment.
- Are you required to make some number of payments to creditors (typically, ones on which you have paid recently) before the negotiated reductions will take effect? If so, confirm that fact with the creditor before signing the DMP.
- Understand how agreeing to a DMP will affect your credit. If the credit counseling agency claims it can remove negative, but accurate, information from your credit file, run – it is illegal to do so. In fact, accurate information can stay on your credit report for as long as seven years.
- Will the agency be able to convince creditors to bring your account current, so that you can use the credit card again, and if so, how many payments must you remit before that happens? Understand that “re-aging” a credit account does not remove past negative information about the account from your credit report.
Tip #4 – Don’t Stop Payments Before Signing with a Credit Counseling Agency
Do not stop making debt payments in anticipation of a DMP negotiation that changes those payments. Until your creditors have accepted the DMP, you should continue paying the bills. If you don’t you may incur late fees and penalties, and your credit report can have negative entries.
Tip #5 – Continue to Communicate with Your Creditors
Confirm all claims by the credit counseling agency regarding your debts with each creditor before agreeing to a DMP – and certainly before sending any money to the agency.
Tip #6 – Ensure the Debt Management Plan Is Set Up to Make Payments On Time
Ensure that the DMP requires that the agency pay your creditors on time. Otherwise you, and not the agency, will be responsible for any late fees or penalties. This means, of course, that you have to pay before the first monthly bill’s due date. If necessary, contact the agency each month to confirm that payments will be made on time.
Tip #7 – Don’t Assume DMP Payments Were Made
Continue to track payments in the monthly account statements you receive from creditors. In addition, confirm that negotiated reductions or waivers are reflected in the account statement.
Tip #8 – Learn From Your Mistakes
If your debt problems are due to irresponsible behavior on your part, take advantage of the free financial counseling offered by legitimate credit counseling agencies to understand your mistakes, and then don’t repeat them. Too many times, consumers struggle through a DMP, only to get in debt again a few years later by making the same mistakes.
Credit counseling can give you a path to get out of debt, but be aware that not all non-profit credit counseling agencies are honest or ethical and investigate any agency before agreeing to use their service. Be aware that other debt relief options, including debt settlement and bankruptcy, actually eliminate some of the principal you owe, whereas credit counseling only reduces or eliminates interest rates and fees.
While credit counseling offers great value, many of the services offered can be performed by the consumer without assistance. However, debt management plans are replete with numerous details, so often it is best to employ the thorough professionals of an experienced credit counseling agency to give you the greatest chance of getting out of debt fully and successfully.