Credit Counseling Financial & Legal Considerations
No matter how you find yourself in debt, owing substantial sums of money to creditors can be a stressful and difficult situation. This is particularly true for individuals who have families to support or who find their financial dreams hamstrung by a low credit score. Debt can arise from a number of sources, including mortgages, credit cards, car financing, and past-due household bills. Fortunately, there are many ways to get your finances back on track. One of the most commonly used methods is credit counseling. A credit counseling company can provide clients with debt counseling services and help them establish a plan that will assist them with meeting their financial obligations.
How to Select a Credit Counseling Agency
When selecting a credit counseling agency, it is important to make sure that the agency is reputable and offers a fair price. Most of these services are not offered for free, but obtaining credit counseling should not put you further into debt. Some companies charge debtors by collecting a percentage of the amount of money that they are able to save you. Additionally, it is important to ensure that the agency provides educational information as part of the price, and does not impose additional fees for these materials. Unfortunately, some of these companies take advantage of individuals who are in debt and collect a fee without providing any real and meaningful counseling. If you have doubts about a particular credit counseling agency, check with your local Better Business Bureau to see whether the company has found itself in any trouble.
Reviewing Your Finances and Developing a Plan
After selecting a credit counseling agency, you will sit down with a counselor and review your current finances. After determining the nature and extent of your financial situation, the counselor will utilize a number of tools to help reduce your debt and consolidate your payments. It is imperative to find the appropriate debt solution that works best for your finances. Initially, your counselor may engage in negotiations with your creditors to see whether they will be willing to accept a lower amount of money. Although this seems unrealistic, many creditors are willing to accept a smaller payment if it means getting a portion of their money back sooner. If the creditor accepts, you may be required to make a lump sum payment, or make a series of payments over the course of a set schedule.
In addition to debt negotiation and settlement, a credit counselor may be able to consolidate your debts and arrange a new repayment plan that better suits your financial situation. Each credit counseling company offers different debt consolidation and repayment plans. In most situations, debt consolidation applies to non-secured debts, which are debts that are not backed by a form of property, like a house. If you are looking for a way to manage your home mortgage or other security-backed debt, you may wish to seek a loan modification with your lender. Common examples of unsecured debts include credit cards, personal loans, and other lines of credit.
Debt Management Plans
One of the services that a credit counseling agency may offer is the creation of a debt management plan, which is a plan designed to help renegotiate outstanding debts and consolidate payments into one monthly expense.
Typically, each of these debts is subject to an interest rate, which accrues monthly and may even recapitalize. Recapitalization occurs when the monthly interest is added to the principal. As a result, the next month’s interest payment will be higher due to a larger principal balance. A credit counselor can work with your creditors to lower these interest rates in addition to finance charges and over-limit fees. Many debts are also subject to a repayment limitation, requiring the debtor to repay the debt within a predetermined period of time. A credit counselor can also negotiate the repayment term.
Last reviewed October 2024
Debt Relief & Management Legal Center Contents
- Debt Relief & Management Legal Center
- Understanding Your Credit Report — Legal & Financial Implications
- Choosing Which Debts to Pay First & Legal Considerations
- Marriage and Debt Under the Law
- Small Business Debt & Your Legal Options
- Debt Consolidation & Relevant Legal Considerations
- Debt Management Plans & Relevant Legal Concerns
- Credit Counseling Financial & Legal Considerations
- Mortgage Loan Modification & Borrowers’ Legal Rights
- Bankruptcy Law & Debt Relief
- Creditor Lawsuits to Collect Debts
- Car Repossessions by Lenders & the Legal Process
- What Methods Can Creditors Legally Use to Collect Debts?
- Debt Relief & Management Legal FAQs
- Find a Collections Lawyer
How to Find Credit Counseling You Can Trust
The pandemic has forced many people to seek help for getting out of debt
Big Cheese Photo / Getty Images
Kimberly Lankford
Published March 30, 2021
If you’re lost in a mire of debt, a credit counselor can help.
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There are many routes to debt problems. You may have lost your job and been swamped with bills, or you may be stuck with credit card balances that aren’t going down. Perhaps you want to tackle your debt before you retire, or you have missed some payments and want to get back on track before your accounts go to collection.
No matter how you got swamped with debt, a credit counselor can help you work on a budget, learn about lenders’ hardship programs, or enroll in a debt management program that reduces your payments and interest rates. But there are also a lot of scam artists that prey on people who are worried about their debt. Here’s how to find a credit counselor you can trust, and what to expect when you work with one.
How credit counseling works
Credit counselors can provide several levels of help, typically starting with a free budget counseling session. “Once the counselor reviews how they’re spending their money, and their income and their debts, then they can make a suggestion,” says Heather Murray, manager of community relations for Advantage Credit Counseling, a Pittsburgh-based credit counseling agency that serves clients in 37 states. “We try to give the client options of what could be a good fit for them.”
If you need short-term help — say you’ve lost your job and you’re worried about paying your bills for a few months until you get a new job or start to receive unemployment benefits — a credit counselor can review your budget and set priorities for how you use your limited money. The credit counselor can also let you know about lenders’ hardship programs that let you skip payments or reduce your interest rate if you lose your job or face other financial challenges. Many have special COVID relief programs, too.
“A lot of creditors this past year have worked with their clients and have offered deferments on their credit card payments,” says Murray. “Each creditor has handled it differently.” Learning about your options from all of your creditors helps you triage your payments if you can’t afford to make them all — at least until you start to receive unemployment benefits or get a new job.
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If you have longer-term debt issues and you’re facing more than a temporary hardship — if, for example, you’re having trouble making more than your minimum credit card payments and your debt isn’t going away — you may benefit from a debt management program. The credit counseling agency makes arrangements with each of the credit card companies to reduce your interest rates and monthly payments, and may eliminate overlimit fees and late fees. The client makes one monthly payment, and the credit counseling agency then distributes the money to the lenders.
These debt management programs are designed to last for four or five years. At the end of that time, you will have paid all of the principal back to your creditors, so you don’t get a hit to your credit score for charge-offs. “Clients who are in our program who are successful do have stable incomes — they do have to make that monthly payment,” says Murray. The lenders have strict requirements for staying in the program; you usually can’t miss more than one or two payments before the lender removes you from the program.
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When to seek credit counseling
It’s better to get credit counseling sooner rather than later. You’ll have more options if you get help before you start missing payments — and you can get back on track before hurting your credit score.
“Some people come in much later because they were holding out hope throughout the first few months that something miraculous would happen, but it rarely if ever happens that way,” says Bruce McClary of the National Foundation for Credit Counseling, an organization of nonprofit credit counseling agencies. “In most cases, if you stick your head in the sand, it will get much worse.”
Another good time to contact a credit counselor is when you’re looking for a plan to get out from under your debt before you retire. “Around age 50 really is the right age to start to think about paying down your debt, making sure that when you retire that the monthly income you have you’re able to use for your living expenses and extras, and that you’re not working on paying credit card debt,” says Murray.
Some clients come to counselors when they receive extra money and are trying to figure out the best way to use it to help their finances. “A lot of people used their stimulus payments, if they were in a position to, to pay off their debt,” says Murray. “It was really exciting and gratifying.”
It’s not too late to get help, even if you’ve missed some payments, and it makes a big difference if you get that help before you miss three payments. “The third missed payment is a critical juncture,” says McClary. “If you’re missing four or five payments, they’ll generally close the account and send it to a debt collection agency, and they’ll be very aggressive about trying to collect the payments.”
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Some credit counseling agencies offer programs that are a combination of debt management (where debtors pay their principal in full, but the interest rates and payments are reduced) and negotiating to partially write off the debt. Although writing off part of your debt usually has a negative impact on your credit report because the principal isn’t paid back in full, there are some situations where the impact may be lessened. “If you have accounts that are already showing up on your credit report as being charged off and in the hands of a debt collection agency, the negative impact [on your credit score] of settling for less than the full balance would be a lot more muted than if you were to try to settle a pre-charged-off account,” says McClary.
For even more extreme circumstances, credit counselors may refer clients to an attorney. “If their debt is at a point where they’re so far overextended and their income is not sufficient, then we may advise them to seek out legal advice,” says Murray. “They may be considering bankruptcy, which could be an appropriate option if they’re in a situation where they don’t have enough income to make payments.”
Financial Empowerment Centers: Another way to get help
If you’d like broader and ongoing financial help, see if there is a Financial Empowerment Center in your area. FECs, which provide free one-on-one financial counseling for people of all income levels, are offered in partnership with local governments. You can see where FECs are available by using this map. Financial Empowerment Center counselors can help you review your budget, figure out how to reach your goals, and prioritize all your financial obligations, not just your debt. “We target ourselves to someone who is working through a financial issue or working toward a financial goal,” says Becky Johnson, program manager of the Pittsburgh Financial Empowerment Center. The counselors can help with budgeting, credit counseling, saving and banking, says Damara Parra, supervising financial counselor with the New York City Financial Empowerment Center. Many people contact FECs after going through life changes — such as losing or changing a job, getting divorced or going down to one income — for help adjusting their budget. Others contact them when they’re experiencing a financial hardship. “It’s never too early, and it’s never too late,” says Johnson. “The missed payments are going to turn into something bigger.” If you need temporary help paying your bills after you lose your job, the counselors can get on the phone with you when you call your lenders and your other creditors, such as utility companies, and can help you learn what to say when asking about hardship programs and payment plans. “That’s the empowerment piece – giving people the skills and confidence to use the tools available to them,” says Johnson. They can also help you get your credit report and show you what you can do to improve it. “We help them look at their credit report and understand what it means and what they can do to fix it,” says Parra. If you could benefit from a debt management program, they may refer you to a credit counseling agency, or they may help you work with your budget and provide ongoing financial counseling. “We will look at the whole situation,” says Parra.
Where to find a credit counselor
You can find a nonprofit credit counseling agency through the National Foundation for Credit Counseling. NFCC members are 501(c)3 charities and must meet accreditation standards and offer financial literacy programs in addition to debt management. Counselors must meet training and certification requirements. It’s also a good idea to look up a credit counseling agency’s record with the Better Business Bureau. “See what kind of complaints they have and what their rating is,” says Murray.
Credit counseling agencies are licensed by their state, which often determines their maximum fees. Advantage Credit Counseling, for example, is licensed by the Pennsylvania Department of Banking and Securities, which regulates maximum fees. Their setup fee for the debt management program is $50, and the monthly fee is $10 per creditor, with a maximum of $50. They don’t charge anything for counseling. Other states have different guidelines, but they generally specify maximum setup and monthly fees.
Credit counseling agencies primarily help with unsecured debt, especially credit cards, but some have other programs, too. Some credit counseling agencies also offer HUD-approved housing counseling to help with home purchases or foreclosure prevention. “Another area is student loan debt and affordable student loan repayment, and many of our agencies provide student loan counseling,” says McClary. They can help people assess their payment options for both federal and private student loans. Some credit counseling agencies also offer financial coaching for small-business owners, he says. (AARP also offers a student loan counseling service).
Kimberly Lankford is a contributing writer for AARP, covering personal finance and Medicare. She has been a financial journalist for more than 20 years. She was the Ask Kim columnist at Kiplinger’s Personal Finance Magazine, and her articles have also appeared in AARP TheMagazine, U.S. News & World Report, the Washington Post, the Boston Globe and others. She received the personal finance Best in Business award from the Society of American Business Editors and Writers, and has written three books.
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