Getting out of serious debt does not have to end in bankruptcy. Another option that has helped many is credit counseling. This service provides a solid solution to not only help people get out of debt, but can also give them the long-term ability to stay out of debt.
What is credit counseling?
Credit counseling services provide clients with an overview of their financial condition and will work with them to develop a realistic plan to pay off that debt. Many credit counselors also provide courses or information designed to help clients develop money management skills that enable them to stay out of debt.
Some credit counseling agencies provide more services than those already mentioned. They may, for instance, offer a "Debt Management Plan" (DMP), which is optional. Once the client signs the DMP, the agency then proceeds to contact the client's creditors in an effort to do the following:
- Renegotiate the amount of debt (debt forgiveness)
- Obtain a lower interest rate
- Remove late payment fees
When the debt is renegotiated, the credit cards become inactive. This ensures that no more debt can be accumulated while paying off the existing debt.
Credit counseling agencies can only work with unsecured debt, or credit card debt. Their goal is to combine all of the client's unsecured debt to give them a single payment per month and a plan that will eliminate their debt within a five-year period or less. By reducing their overall debt, the client is given a lower monthly payment that is more easily managed, giving them some financial breathing room.
When and where to seek credit counseling
Every person seeking bankruptcy in the United States is required to go through credit counseling services prior to going through with the bankruptcy action. This step ensures that the client is more knowledgeable about finances and should be able to avoid getting in those circumstances again.
Credit counseling services should be obtained as soon as possible after realizing that the debt appears to be too much to handle, but before it becomes necessary to declare bankruptcy. It may be considered too much when any of the following apply:
- Living from one paycheck to another
- Frequent arguments break out with spouse about money
- Hiding bills and financial statements from the spouse
- Debt collectors are calling
- Do not know total amount of debt
Obtaining credit counseling early enough enables people to have more time to reduce debt so that bankruptcy can be avoided. Seeing a financial counselor early will also help avoid late fees, more interest charges, and a credit score that is going lower and lower.
Tips on selecting a credit counseling agency
There are many credit counseling agencies around. Many of them are not reputable, so it is necessary to be careful about choosing one. Here are some questions that should be asked prior to making the choice.
- What services are available? Look for agencies that provide a wide variety of services.
- What kind of information is provided to promote better money management in the future?
- Is a formal agreement necessary? If so, be sure to read the document before signing and ask questions if something is not clear.
- What are the fees for the services?
- Are the counselors professionally trained? What certifications do they have and who gave it to them?
Professional credit counseling agencies want to help, and there is a lot they can do. Drop in for a visit and find out if they are friendly, because most likely it will be necessary to work with them for some time. Find out how they work and what they can do before signing.