Credit Counseling

Overview of Credit Counseling

Credit counseling is a process involving one party educating consumers on how to avoid incurring debts that cannot be repaid, and by establishing with clients a planned method of debt relief, typically through a Debt Management Plan.  This process typically takes place after the consumer has incurred such debt as to warrant the possibility of Bankruptcy.

Credit counseling will often involve negotiating with creditors to establish a debt management plan (DMP) for a consumer. A DMP may help the debtor repay his or her debt by working out a repayment plan with the creditor. DMPs, set up by credit counselors, usually offer reduced payments, fees, and interest rates to the client. Credit counselors refer to the terms dictated by the creditors to determine payments or interest reductions offered to consumers in a debt management plan.

The representative of the agency will analyze their client’s financial condition and help to prepare a budget and negotiate with creditors on a new repayment plan based on what is affordable. The representative will also ask creditors to waive penalties, interest incurred, over limit charges, and late payments.

Types of Credit Counseling

There are four main types of credit counseling:

Consumer credit counseling: These are traditional counseling services, which will charge a fee against their service. Consumer credit counselors will analyze a client’s financial condition, help prepare a budget, and negotiate with creditors to lower interest rates and waive penalties, late payments, and over limit charges.

Bankruptcy credit counseling: According to the federal bankruptcy law, introduced on 17th October, 2005, it is mandatory to undergo a credit counseling session at least 6 months, before filing for bankruptcy. This is called pre-bankruptcy counseling.

This counseling session can take place over a phone, online, or in a face to face meeting.  The session should include an evaluation of the client’s personal financial situation, a discussion of alternatives to bankruptcy, and the creation of a personal budget plan. The fee for this type of service is 50 dollars however; there is a fee waiver for those in dire financial times.  Bankruptcy credit counseling will provide a certificate as a proof of completion.  To have debts discharged after bankruptcy, a debtor education course must be completed, which is an addition fee of 50 to 100 dollars.

Christian credit counseling: Christian credit counselor’s work in the same way as other credit counselors, but a Christian credit counselor will help clients to become debt–free by creating strategies from the Biblical view point. Though the name suggests Christians, non Christians can also take advantage of this service.

Non-profit credit counseling: There are many counseling agencies that claim to be nonprofit companies to attract customers. These companies will sometimes charge high fees for rendering services.  Prior to enrolling with a Non-profit, it is common practice to verify the company’s non-profit status. This is done by asking the company to provide proof of its 501(c) (3) IRS status, of being truly nonprofit. The agency will charge a lower fee than the traditional agencies for rendering their service.

Benefits of Credit Counseling

Credit counseling is important in establishing a debt management plan, which is negotiated between creditors for consumers.  Debt management plans include reduced payments, consolidation of debts, a systematic interest rate, and a small fee.   Counselors on behalf of their clients can renegotiate terms and conditions to make it much more effective for their clients to live free from debts in the future.

Clients will on average see a 10-20% reduction in their total debt, and payment will generally decrease by 30%. This is achieved by renegotiating terms to keep interest rates low.  After all, it’s in the bank’s interest that the loans are repaid.

Bill consolidation is a large benefit to those burdened by multiple types of debt.  Bill consolidation transfers all outstanding debts and loans into a single bill and reduces interest rates to a manageable monthly payment.

Who Should Use Credit Counseling

Anyone who is having trouble paying their bills on time should seek credit counseling.  Inconsistent debt payments can ruin credit scores; however, credit counselors can renegotiate and consolidate their client’s bills into an affordable monthly payment.  Those with unpaid credit card bills, IRS tax debt, student loan, personal loans, unpaid utility bills, unpaid medical bills, or attorney bills should seek counseling.  Also anyone seeking to file bankruptcy must complete a credit counseling session 180 days before applying to declare bankrupt.