Credit Counseling Services: An Alternative to Bankruptcy?
Sometimes unforeseen circumstances can take a toll on our finances. We may get into more debt than we can comfortably repay. Or we may experience health problems or job losses that leave us with less money. Bankruptcy may seem like the only answer, but is it?
Many consumers who are having trouble paying off unsecured debts seek credit counseling. The process often involves analyzing your financial situation and determining how you can best pay off your debts while preventing further damage to your credit. While some who seek credit counseling still end up filing for bankruptcy, others find that it is just what they needed.
How Credit Counseling Works
The first step in credit counseling is the consultation. This is often free, but some agencies charge fees. Debtors must make a list of their debts, balances and payment amounts for the counselor to work with. Depending on your individual situation, the counselor may help you rearrange your budget to accommodate your current payments, suggest debt management classes and/or help you develop a debt management plan.
A debt management plan is often suggested for those who are truly in more debt than they can pay. It involves negotiating with creditors to obtain lower interest rates and monthly payments. The credit counselor does this on your behalf, and once negotiations are complete, determines your total monthly payment and length of time it will take to pay everything off.
If you agree to the plan, you start making a single payment each month to the credit counseling agency. The counselor then forwards the appropriate amount to each creditor. Fees may be added to the payment, or they may come out of the amount you’re paying your creditors.
Good credit counseling agencies will offer more than just debt management programs. They realize that while these programs work for some people, they are not for everyone. Some merely need help creating and sticking to a budget. Others would be better off filing for bankruptcy. Even those for whom a debt management program is a good fit should be strongly encouraged to work on their money management skills.
There are a few things to look for when considering a credit counseling agency. First of all, agencies must be licensed to operate in your state before they can work with you. They should tell you their fees up front and offer free information about what they do. Their counselors should be accredited or certified by an outside organization, and should also be required to have extensive education in finance.
For some, bankruptcy is the only way to put their debt behind them. But other consumers can benefit from credit counseling. A reputable agency can help you pay off your debts while still having enough money to live on and improving your credit score.