Credit counseling and your credit
The way they are paid is through “donations” from their creditors. They negotiate with all of your creditors to lower your interest rates and payments. You pay the counselor the sum of your creditors’ payments. They send payments to creditors. In return, the creditors pay the counselor a donation.
Sounds like a good thing, right?
Before committing to such a service, you need to understand what its purpose is. To get nonprofit status with the IRS, they need to provide real educational services to consumers to help them with debt management, budgeting, etc. The IRS is currently auditing many of these organizations. So far, they have discovered that these credit officers do not provide such a service and only exist to receive fees from creditors. They have revoked the non-profit status of several companies.
These companies are called “predatory credit counselors.” They take your monthly payment and instead of sending it to your creditors, they pocket the money.
These bad apples have put the consumer in a real dilemma. New US bankruptcy laws will require debtors to enter a credit counseling program before filing for bankruptcy.
In theory, credit counseling can be a great service when executed correctly by all parties involved. That is, the counselors actually provide an educational service, and the consumer actually learns and implements what they are told. This can pave the way to a secure and debt-free future. What can you do to avoid becoming a victim?
First, find out if the counseling agency charges you a fee. Even if they are non-profit organizations, they may still charge you for their initial services, such as a setup fee. A reputable company will not charge you exorbitant amounts of fees, as that would defeat the purpose of seeking their help in the first place.
Next, try to find out how your counselor is paid. If they earn a salary, you’re in good shape. If they work for commissions or earn bonuses based on leading you to more expensive debt consolidation programs, beware. Good counselors will do what is best for your pocket, not theirs.
Just because credit counselors work with creditors does not mean that creditors work with that particular company. When a consumer enters a credit counseling program, the counselor sends a proposal to the creditor. The creditor then has the option to approve or reject the proposal. If it is denied, there is nothing more that can be done with that particular creditor. You will have to negotiate with them on your own. Call your creditors directly and make sure they accept the proposal first.
Get all promises and terms made by the counselor in writing. A verbal promise is not binding. Also, make sure the counseling agency submits monthly reports describing each transaction; how much you paid them and where the money goes. Verify that your money is actually paying your creditors, not your advisers.
How does entering credit counseling affect your credit? It is up to an individual lender as to how they view credit counseling. Your counselor will have you believe that you are positive because you are taking proactive steps to get your debts in order. However, many lenders view credit counseling as the final step before bankruptcy. Going into counseling could tell them that you have a debt management problem and suspect that you may default on your loan. In fact, many lenders will reject your application outright if you are currently in a debt management program, such as if you were in an undischarged bankruptcy.
If you find yourself in a situation that might require credit counseling, or even file for bankruptcy, check your credit report first. Make sure your report is completely accurate. If necessary, take steps to increase your credit score. You may benefit more from getting an actual loan to consolidate your debt than from entering debt management and bankruptcy. You can only get a loan if your scores are high enough. Make an effort to increase your scores, get a consolidation loan, and make sure you never get into the same debt situation again!