Credit counseling is a professional service from a credit counseling agency. In the US, there are many good credit counseling agencies, most being non-profit organizations. They provide two main services:
- Education on personal management of finances and credit, including credit cards.
- Debt Management Plans (DMP)
The US federal bankruptcy reform of 2005 requires that any individual filing for bankruptcy, or seeking final discharge from Chapter 13 bankruptcy, must first obtain credit counseling. This can only be obtained from a non-profit credit counseling agency registered for this purpose. However, any bankruptcy lawyer can refer you to an appropriate agency. The pre-bankruptcy counseling certificate must be taken no later than 180 days of the date that your bankruptcy case was filed. If it’s out of date, your case would be dismissed. Also, a second course called debtor education course must be taken after the bankruptcy is filed to obtain a discharge Order.
Good credit counseling agencies offer debt consolidation services. Many agencies also serve their communities by providing housing counseling (under HUD) and/or a variety of other services.
You can choose from many good credit counseling agencies. You should insist on dealing with an agency that offers all the services you may need.
Credit counseling and education
Licensed professional credit counselors educate through individual counseling – in person or by phone or Internet. They prefer to do it in person, to be sure that they understand the client and communicate what the client really needs. However, the client’s location or cost pressures can make phone or Internet counseling the only feasible way to go.
Credit counseling agencies also educate through books, seminars, and a wide variety of courses and on-line tools. Many of these are available free on the Internet, and can help greatly to get your finances in order by yourself.
Many people have difficult time identifying their financial problem areas, and therefore struggle to find ways to fix them. Credit and debt counseling can help you visualize what needs to change, and help you develop a plan to get back on track. Credit and debt counseling services focus not only on the problem at hand, but also on prevention of future problems.
With the help of counseling, you may find ways to repay your debts through careful money management and budgeting, or through using the agency’s debt consolidation service. This can preserve or even enhance your credit rating.
Debt Management Plans
A Debt Management Plan (also called Debt Management Program) is an arrangement made by a credit counselor between you and your creditors. You make a single monthly payment, and the counselor makes payments to the creditors. Because the credit counselor is involved, creditors feel surer of the payments, and may accept less than the total amount owed.
A DMP is generally completed within five years, often less than four years. At the end of this time, your debts are discharged.
For example: If you owe $20,000 to five different credit card companies, the credit counselor would create a Debt Management Program for you where you pay the credit counselor, say, $500 per month, the money is distributed to your creditors, and over a 40 month period all of your debts are paid off.
Because you resort to a credit counselor for a DMP and generally pay less than you owe, your credit rating will suffer. Obtaining future credit will be more difficult or be at higher interest. However, this option is not as damaging as going bankrupt.