- Legal EditorHenry Dahut, J.D.
Henry Dahut, J.D.
Attorney - Legal Publisher - Educator
Henry Dahut is a licensed California trial attorney. Over the course of his 30-plus years practicing law, Henry has represented and counseled countless clients in legal trouble.
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The goal of consumer credit counseling, also called credit debt management services, is to show consumers how to pay down debt and rebuild credit. Many types of credit counseling services are non-profit organizations and charge a modest fee for their services.
Three Goals Of Credit Counseling
First Goal: Get a clear picture of the debtor’s financial situation
A major benefit to consumer counseling is that it helps the debtor clarify the type and extent of their debts and the financial options available to them.
The first step is to create a written document that lists all the debts and creditors and their payment history and determines if they are secured or unsecured.
Second Goal: Organize and draft a debt management plan
Most consumer credit counselors are trained, certified, and experienced in the field of credit and debt management. They are also trained in budgeting income and expenses, which is necessary to develop a successful debt management plan for their client.
A debt management plan is essential in organizing and managing your current and anticipated financial obligations through budget management planning. From your debt management plan, you will determine which options you should be considering.
Carefully considering your options should be based on the size of your current debt within the context of your debt management plan and your present and anticipated future income goals. Helping you make this determination is the third and final goal of budget management planning.
Third Goal: Consider all your present and future options
One option is to consider debt consolidation, which, in most cases, extends your repayment term under a new loan. The downside is that you have not gotten rid of your debt but have instead extended the same debt for a lower monthly payment. Unfortunately, a high percentage of people who choose debt consolidation end up defaulting on the new loan and eventually filing for bankruptcy.
Under certain circumstances, bankruptcy is viable and should be considered carefully. Credit reporting agencies focus on scoring you based on how promptly you pay your bills and whether you have defaulted on any of your creditors.
Your Credit History
Credit agencies score consumers on the amount of income they declare compared to the amount of debt they carry and whether they have any public records of legal judgments, liens, foreclosures, car loan defaults, and car repossessions.
Suppose your primary concern is your credit rating. If so, consider that if you have been a late payer on your debts or defaulted on your debt, your credit score will be of no assistance to you.
Your credit record has already been scarred, making getting new credit very unlikely for the next three years. This assumes you can demonstrate a good repayment history over those three years.
Considering The Bankruptcy Option
In contrast, Chapter 7 Bankruptcy stays on your credit record for ten years. However, this needs to be compared to how long reportable debt, such as a loan default, will remain on your credit record. The answer is about seven years. What does this mean?
It means you can continue to pay your old debt on extended repayment plans and still have an adverse credit record. Or you could stop paying on your existing debt by filing Chapter 7 bankruptcy, have your debt discharged permanently, and have a fresh start, which is the stated purpose of the bankruptcy laws.
The above considerations may determine your financial future. Take your time before deciding on any single course of action. Consult an experienced financial advisor before making a major decision.
Being a Careful Consumer of Credit Services
Before retaining a consumer credit counseling or debt settlement service, make sure you first check their reputation and history of business practices. We strongly suggest you check their record with both the Better Business Bureau and the Department of Justice (DOJ).
The DOJ maintains a list of all approved and credentialed consumer credit services by state.
Locating A Credit Counseling Service
If you have questions or require additional information about your specific financial needs, we advise you to consult with a verified DOJ-approved credit counseling service about your particular issues.
Common Misconceptions About Consumer Credit Counseling
Misconception:
Credit counseling agencies only help people who are in severe debt or facing bankruptcy.
Reality:
These agencies provide services for people at all financial levels, offering budgeting advice, financial education, and preventive guidance before debt becomes a problem.
Misconception:
Using a credit counseling service will ruin your credit score.
Reality:
Working with a legitimate credit counseling agency doesn’t directly impact your credit score. In fact, completing a debt management program can improve your credit over time through consistent payments.
Misconception:
All credit counseling agencies are scams.
Reality:
While some fraudulent organizations exist, many legitimate non-profit credit counseling agencies are certified, regulated, and affiliated with organizations like the National Foundation for Credit Counseling (NFCC).
Misconception:
Credit counseling services are expensive.
Reality:
Most non-profit credit counseling agencies offer free initial consultations and financial education. Even their debt management programs typically have modest fees, which may be waived for financial hardship.
Misconception:
Credit counseling is the same as debt settlement.
Reality:
Credit counseling focuses on education and debt management through full repayment, while debt settlement companies attempt to negotiate reduced payoff amounts, which can negatively impact credit scores.
Misconception:
You lose control of your finances when working with a credit counseling agency.
Reality:
Legitimate credit counselors serve as advisors, providing tools and guidance while you maintain control of your financial decisions and accounts.
Misconception:
Credit counseling agencies can only help with credit card debt.
Reality:
These agencies can assist with various types of unsecured debt and student loans and provide guidance on budgeting, housing expenses, and overall financial management.
Misconception:
Once you start a debt management program, you can’t use credit cards anymore.
Reality:
While most debt management programs require closing credit card accounts included in the program, you may still maintain one card for emergencies or business purposes, depending on your situation and the agency’s policies.
