Financial Resource

Article by Nick Spearman

Most of the online information, or misinformation, about credit counseling is on websites designed to sell credit counseling services. Learning about credit counseling from these websites is like learning about cars from a used car salesman.

Credit counseling sounds benign, just giving advice on how to manage debt to people who have too much of it. In practice, however, credit counseling services exist primarily to sign up overburdened debtors to Debt Management Plans, known in the credit counseling industry as DMPs.

Once you sign up for a DMP, you give authority to the credit counseling service to negotiate your debts with your creditors and come up with a single monthly payment for you to pay to the service. The service then distributes money to your creditors. You pay the credit counseling service a fee which may be reasonable, expensive or exorbitant, depending on the company.

The main hazards and drawbacks of a Debt Management Plan:

1. Many credit counseling services suggest that they can reduce your debt by 50% or more, but the typical reduction only 10-20%.

2. Most credit card issuers and other commercial creditors will give you just as good a deal directly as the credit counseling service can get you.

3. Over 60% of DMPs are never completed, and dropping out of a DMP usually leaves the consumer worse off than if the DMP had never been initiated. The failure rate of bankruptcy payment plans is about the same, but this is no reason to prefer a DMP.

4. Many debts cannot be included in DMPs, including back taxes, child support, government guaranteed student loans, or secured debt such as mortgages and car loans. DMPs are primarily geared to credit cards, charge accounts and unsecured loans from banks and loan companies.

5. There are many reputable non-profit credit counseling services, but the industry is overflowing with companies that range from deceptive to shady to scam. If you sign up with the wrong company, you risk paying out huge fees for a plan that might not even suit your needs.

Before deciding about credit counseling, educate yourself. Do a Google or Yahoo search on “credit counseling scams.” Go to the Federal Trade Commission’s website, run by the U.S. Government, for information on credit counseling problems, at http://www.ftc.gov. (Search for “credit counseling” on the website after you arrive there.) Go to the United States Trustee’s website, run by the U.S. Government Department of Justice, for a list of credit counseling services approved by the U.S. Trustee for pre-bankruptcy counseling, at http://www.usdoj.gov/ust/eo/bapcpa/ccde/cc_approved.htm.

After learning about the credit counseling business and its hazards, ask yourself two questions: First, is there anything a credit counseling service can do to reduce your debt and monthly payments that you cannot do for yourself? Second, if you are sure you need outside assistance, are there any advantages of a Debt Management Plan for you as compared to filing bankruptcy?

Personal bankruptcy filings are generally up over 30% this year as the weak economy takes its toll, and more and more ordinary workers and families learn the advantages of filing bankruptcy to get a fresh start with a court-supervised process. For more information on filing bankruptcy, go to Your Bankruptcy Information Website, at here4bankruptcy.com.

Finally, consider one of the most pernicious falsehoods told to promote credit counseling over filing bankruptcy. It is true that an individual must complete a credit counseling course and obtain a certificate of completion within six months before filing any type of bankruptcy. These prebankrupctcy courses usually cost about to , may be taken online, and take about one hour to complete. You can sign up and complete the course the same day you file a bankruptcy. Nevertheless, many credit counseling services claim that a consumer must attend a full six months of consumer credit counseling before filing, and may fall deeper into debt or even lose their home during the “required” six-month waiting period. No such six-month period exists! This is just another unscrupulous tactic.

Staring at a mountain of debt, it is difficult to consider your options clearly, but you can do it. When in doubt, just remember the oldest shopping advice in the world. In Latin: Caveat emptor. In everyday English: Let the buyer beware.

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