Living paycheck to paycheck? Worried about debt collectors? Can’t seem to develop a workable budget, let alone save money for retirement? If this sounds familiar, you may want to consider the services of a credit counselor. Many credit counseling organizations are nonprofit and work with you to solve your financial problems. But beware — just because an organization says it is “nonprofit” doesn’t guarantee that its services are free or affordable, or that its services are legitimate. In fact, some credit counseling organizations charge high fees, some of which may be hidden, or urge consumers to make “voluntary” contributions that cause them to fall deeper into debt. Choosing a Credit Counseling Organization Reputable credit counseling organizations advise you on managing your money and debts. Their counselors are certified and trained in the areas of consumer credit, money and debt management, and budgeting. Counselors discuss your entire financial situation with you, and help you develop a personalized plan to solve your money problems. An initial counseling session typically lasts an hour, with an offer of follow-up sessions. Once you’ve developed a list of potential counseling agencies, check them out with your state Attorney General, local consumer protection agency, and Better Business Bureau. They can tell you if consumers have filed complaints about them. (But even if there are no complaints about them, it’s not a guarantee that they’re legitimate.) After you’ve done your background investigation, it’s time for the most important research — you should interview the final “candidates.” Debt Management Plans If your financial problems stem from too much debt or your inability to repay your debts, a credit counseling agency may recommend that you enroll in a debt management plan. Consider signing on for one of these plans only after a credit counselor has spent time thoroughly reviewing your financial situation, and has offered you customized advice on managing your money. How a DMP Works You deposit money each month with the credit counseling organization. The organization uses your deposits to pay your unsecured debts, like credit card bills, student loans, and medical bills, according to a payment schedule the counselor develops with you and your creditors. The main benefits of this program is rate reduction not a payment or amount owed reduction. Your payment may be near what you are already paying but because of the rate reduction you are now paying down the principle balance faster. A successful DMP requires you to make regular, timely payments, and could take 60 months or longer to complete. Ask the credit counselor to estimate how long it will take for you to complete the plan. You also may have to agree not to apply for — or use — any additional credit while you’re participating in the plan. The creditors that accept the DMP will close your account so you will not be able to use any further credit. The cost for a debt management plan varies so interview a few agencies. Some agencies are truly non-profit and may only charge the lesser of 8% of the amount paid to creditors monthly, or $35. An education and counseling fee of $50 may also be charged. The non-profit agencies are given contributions by the same creditors that your debt is being negotiated with. The for-profit agencies may have credit repair and debt settlement services to offer in addition to the DMP. Is a DMP Right For You? In addition to the questions already listed, here are some other important ones to ask if you’re considering enrolling in a DMP. How does your DMP work? How will you make sure that all my creditors will be paid by the applicable due dates and in the correct billing cycle? If a DMP is appropriate, sign up for one that allows all your creditors to be paid before your payment due dates and within the correct billing cycle. How is the amount of my payment determined? The term of the program is typically five or more years. Some creditors will offer a lowered fixed interest rate while others may lower your current monthly payment by about 15%. Both options acheive the same effect on lowering the time it takes to pay them back by lowering the interest rate. Typically the payments are almost identical to what you are currently paying. If the payment they offer is too high then do not go with the debt management plan. Also, contact each creditor to confirm the new payment is the same as what the DMP provider is telling you. How often can I get status reports on my accounts? Can I get access to my accounts online or by phone? Make sure that the organization you sign up with is willing to provide regular, detailed statements about your account. Can you get my creditors to lower or eliminate interest and finance charges, or waive late fees? If yes, contact your creditors to verify this, and ask them how long you have to be on the plan before the benefits kick in. Most creditors will agree to bring your account current (also called re-aging) after making two or more payments through the plan and possibly agree to waive any late fees. What debts aren’t included in the DMP? This is important because you’ll have to pay those bills on your own. Mortgages, gasoline credit cards, tax liens, and judgements or collections are not allowed. Sometimes debts that are more than 2 months (60 days) behind are not allowed. Unsecured debt like credit cards or medical bills and personal loans are allowed. Do I have to make any payments to my creditors before they will accept the proposed payment plan? Some creditors require a payment to the credit counselor before accepting you into a DMP. If a credit counselor tells you this is so, call your creditors to verify this information before you send money to the credit counseling agency. How will enrolling in a DMP affect my credit? When your creditors agree to the DMP there will be a comment (Credit Counseling) added to the debt (trade-line) on your credit report. The credit counseling comment typically makes it hard if not impossible to get qualified for auto or home loans but the comment alone does not lower the credit scores. Your payment history while you are in the program can effect your scores and for up to two years after completion of the program a lender may require the plan payment history for granting you credit. Once the plan is completed the comment is typically removed. Could Debt Settlement be a better solution? Sometimes eliminating all of the debt at a fraction of what is owed is the only solution. If paying on a lower interest rate over 3 or more years is still too dificult for you to make you might consider debt settlement or lastly bankruptcy.
How to Make a DMP Work for You The following steps will help you benefit from a DMP, and avoid falling further into debt. Continue to pay your bills until the plan has been approved by your creditors. If you stop making payments before your creditors have accepted you into a plan, you’ll face late fees, penalties, and negative entries on your credit report. Contact your creditors and confirm that they have accepted the proposed plan before you send any payments to the credit counseling organization for your DMP.
Make sure the organization’s payment schedule allows your debts to be paid before they are due each month. Paying on time will help you avoid late fees and penalties. Call each of your creditors on the first of every month to make sure the agency has paid them on time. Review monthly statements from your creditors to make sure they have received your payments. If your debt management plan depends on your creditors agreeing to lower or eliminate interest and finance charges, or waive late fees, make sure these concessions are reflected on your statements.
Check the company out If you decide to work with a credit counseling company, be sure to check it out with your state Attorney General and the Better Business Bureau. They can tell you if any consumer complaints are on file about the firm you’re considering doing business with. If a counselor has certification through one of the major trade organizations/credentialing bodys it shows a high level of professionalism.
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