Credit counseling and debt management are two distinct things, although they are often conflated. The truth is that credit counseling is a type of debt management, which is a blanket term for any approach to debt relief. Credit counselors are financial professionals who work with debtors to come up with a solution to their money woes. The most common form of debt relief is called a debt management plan and they are created by the debtor in conjunction with a credit counselor.
Credit counseling is an integral part of debt management. People typically get into debt because they lack the knowledge to create a realistic budget for their income. This fact combined with the widespread availability of credit is a poison pill. It practically guarantees that most people, at one point in their lives, will lose control of their finances. Fortunately, credit counseling exists to assist such people with both eliminating their debt and learning valuable financial skills that will serve them after they have completed their debt relief program.
What is Credit Counseling?
Credit counseling is an important service offered to individuals who have become overwhelmed with debt. Credit counselors are professionals who have the experience and knowledge to assist debtors formulate a realistic repayment plan based on the debtor’s individual financial situation. In fact, credit counseling is mandatory for any individual who is attempting to resolve their debt by filing bankruptcy. This is because credit counseling has two purposes: to help debtors eliminate their debt and learn the money management skills that will help them stay out of financial trouble in the future.
You may not need credit counseling. If you can afford to work out a budget on your own, you should attempt to do so. However, if you find that you cannot manage your finances on your own, seek out a credit counselor to get a clearer picture of what your options are.
What is Debt Management?
Debt management is method of debt relief that usually involves the creation of a debt management plan or structured repayment plan designed by the debtor in conjunction with a credit counselor. These plans are typically created using three steps.
The first step is to meet with the credit counselor and review the amount of debt owed, the creditors to whom it is owed, and the interest rates on each individual debt. The credit counselor totals the debt in order to find the exact total owed. Secured debt, such as car and home payments, is not considered part of the first step and are factored into the second list compiled by counselor.
The second step is to look at the debtor’s monthly income and expenditure. This includes rent, food, and other living expenses, as well as any secure debt the debtor may have. Contrasting this information to the debt will allow the creditor to work out what financial solutions are available to debtor.
The final step is to negotiate with the creditors and attempt to reach a middle ground wherein the creditors still receive monthly payments, but on a schedule and rate the debtor can reasonably afford. The credit counselor can act as an advocate and ask creditors to freeze interest rates, lower the total sum owed, and other financial incentives. Once a deal has been worked out, a comprehensive debt management plan is presented to the debtor.
This plan details the amount of time it will take to pay off the debt, as well as the amount that will be paid to creditors each month. After a plan has been agreed to the debtor deposits a certain sum with the debt management company every month, which then disperses the money to the appropriate creditors.
Debt management can be a great road out of debt – if you can find a legitimate credit counselor to work with.
How to find a legitimate credit counselor
There are few significant things to look for when choosing a credit counselor. There are many unscrupulous debt management companies that exist only to take money from customers, rather than assisting them in repaying their debts. To begin with, a legitimate credit counselor will have your best interest at heart. They should not demand fees prior to consultation, nor should they hesitate when answering any questions you may have. If they fail to satisfy any of your concerns, you should move on to another organization.
You should look for a counselor who is affiliated with national accrediting organizations for their field. Self-Accreditation is not acceptable when it comes to a matter as serious as debt repayment. While accreditation is not a guarantee of legitimacy, it does imply that appropriate checks and balances have been applied to the organization.
A legitimate credit counselor will offer a wide-range of services. There is no one-size-fits all approach to debt repayment. Beware of any counselor or organization that offers only debt consolidation or settlement. In addition, any organization that requires that you to pay a feee up front prior to any consultation should not be trusted. If the counselor cannot give you answers without first requiring a payment, they probably don’t have the answers you’re looking for. The typical fee for enrollment in a debt management program is $50-150 with monthly fees of $25, but all fees can be waived in the case of true hardship.
Online Resources
The internet is a great resource when attempting to find a reputable debt management company in your area. As mentioned above, national accreditation from an independent third party is definitely something to look for. You can check databases hosted by the National Foundation for Credit Counseling and the American Association of Debt Management Services for accredited counselors in your area. These organizations have high standards for counselors admitted to their ranks; therefore you can generally trust their accredited counselors to be ethical when working with your money. You can also check the Justice department for lists of counselors whose business practices are in line with federal regulations. Finally, the Better Business Bureau can tell you whether or not the counselor you are considering is regarded as a reputable businessperson.
Sources
An Overview of Credit Counseling
NCFF: Counseling Guidelines
Fiscal Fitness: Choosing a Credit Counselor
Find a credit counseling agency through the American Association of Debt Management Organizations
Find a Counselor through the National Foundation for Credit Counseling
Justice Department approved Credit Counseling Services
