Understand Debt Management and Counseling Firms

Above is a reasonably credible explanation of debt management.

Credit card debt management and credit card debt counseling services can be used interchangeably by some debt service organizations. Traditionally these services have offered advice on how to better manage your finances; advice such as transferring high-interest balances to lower interest cards, paying off high interest balances first, classifying debts as secured and unsecured, etc. In additional to nominal service fees for debt advice, these companies are compensated by helping you consolidate your payments into one monthly payment to them, which they in turn break up and dole out to each of your credit card accounts ideally at favorably negotiated interest rates and lowered monthly minimum payments. That is usually called debt management and is usually performed by a debt counseling agency. Traditionally the credit card banks have allowed them to withhold a percentage (10-15 percent) for themselves as compensation for working with account holders to assure their payments are made on time. Supposedly this happens without damage to consumers’ credit ratings.

Understand Debt Mgmt/Counseling Firms The consensus is many of these firms are, in a sense, working for the credit card banks helping to collect your payments. These services have been proliferating, and the credit card banks have been decreasing their “contribution” to these services. If credit card banks don’t put a blemish in a card holder’s credit report for participating in debt counseling or a debt management program, the card holder still risks credit damage when late payments result from confused payment schedules, or simple administrative ineptitude on the part of the debt management or debt counseling service.

With the new bankruptcy law of October 2005, people filing for bankruptcy must first receive a “briefing” from an “approved” credit counseling agency.

Some of these debt management and debt counseling services are credible, others are not. Many, with less than ethical business practices, use their non-profit status to make consumers feel comfortable dealing with them. The ultimate test of their credibility and trust-worthiness is not whether they are non-profit, or Christian, etc., but whether they belong to their professional association, the Association of Independent Consumer Credit Counseling Agencies, and run their business in keeping with that association’s standards. Generally that means they do what they say they are going to do, and their fees are reasonable.

These are guidelines to use when evaluating debt management or debt counseling services.

You need to be reasonably skeptical and dully diligent when interviewing these resources to learn if they are credible and if they can be of help to your particular situation. You should decide ahead of time (or independently of their sales pitch) if you are willing to put money in their bank account for them to pay your bills, or if you have the discipline to save and make those payments yourself.

Their upside is:

  • your use of them will only bruise your credit rating and
  • the convenience to you of making only one monthly payment.

Their downside is you are risking more damage to your credit rating and more collection activity if they fail to make your payments in a timely fashion and . . .you will by paying back all of what you owe with this strategy over a long period of time.

Carefully review their contract, being sure you have legal recourse to pursue them in court if they cause you damage. Be sure they account monthly for all payments made to your accounts.

The federal Credit Repair Organizations Act, state debt management laws and federal and state unfair and deceptive practices (UDAP) laws offer consumers some recourse to mistreatment by these agencies.

Evaluating Credit Counseling Agencies

These are excerpts from the Association of Independent Consumer Credit Counseling Agencies (AICCCA) standards and best practices. Review these points and use them to evaluate the credit counseling agencies you talk to about your credit situation.

Counselors

  1. Must be properly trained and qualified to provide clients with a quality financial education experience.
  2. Must be certified by an organization acceptable to the Association within 12 months of the date of hire.
  3. Must provide a comprehensive, one-on-one money management counseling interview following a prospective client’s request for counseling services, and provide a written assessment and action plan to the client as applicable to the service provided.
  4. Counselor compensation cannot be based on outcome of counseling process.
  5. All services must be available to the public regardless of ability to pay and at no time should a person be refused service due to an inability to pay.
  6. Fees to clients should be as low as possible, and should consider the financial situation of the client.
  7. Agency may not charge a fee for credit repair nor be affiliated with an organization that does.
  8. Any materials that discuss debt management plans must include a disclosure regarding the agency’s dual role in serving the needs of consumers and creditors.
  9. Prior to the receipt of the client’s first deposit, an agency must provide each client enrolling in a debt management plan with a reliable estimate of the length of time it will take to complete the plan. This must be provided in writing and identify all creditors included in the plan, the amount owed to and the proposed payment to each creditor, and the anticipated number of months to liquidate the debt.

Fees

  1. All services must be available to the public regardless of ability to pay and at no time should a person be refused service due to an inability to pay.
  2. Fees to clients should be as low as possible, and should consider the financial situation of the client.
  3. Agency may not charge a fee for credit repair nor be affiliated with an organization that does.

Business Practices

  1. Any materials that discuss debt management plans must include a disclosure regarding the agency’s dual role in serving the needs of consumers and creditors.
  2. Prior to the receipt of the client’s first deposit, an agency must provide each client enrolling in a debt management plan with a reliable estimate of the length of time it will take to complete the plan. This must be provided in writing and identify all creditors included in the plan, the amount owed to and the proposed payment to each creditor, and the anticipated number of months to liquidate the debt.

Client Funds

Agency must carry adequate insurance or bonding on all employees with access to agency or client funds, with coverage based on the level of funds handled by the agency. Member agencies must add the Association to their respective Certificate of Insurance bonding policies for the purpose of receiving notice of any potential lapse in coverage due to non-payment of premium. All client funds must be kept in a separate trust account in an FDIC insured, or equivalent, bank or financial institution.

Credit counseling could be very helpful to understanding your debt situation better.  But, you must decide if you can actually afford to pay any money for any type of program.  Here are some of my posts for those who decide they cannot afford to pay anything.

 

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