Credit Counseling - Part Two

Does Credit Counseling Work?

Read part one of Credit Counseling for more information.

What to Expect in Credit Counseling

First of all, if you have so little income or so much debt that you can’t work your way out of it in four or five years, a credit counseling agency can do little to help and bankruptcy is probably your only option.

Any secured debt, first and second mortgages and car loans being the most common, will not be negotiable. Those lenders have their security and have no reason to bargain. According to the National Consumer Law Center in a report issued in April 2003, “most creditors are also becoming increasingly unwilling to reduce interest rates for consumers who enter debt management programs. In the last four years, five of 13 major credit card issuers have increased the interest rate they offer to consumers in DMPs {debt management plans} (Bank One/First USA, Discover, Chase Manhattan, Fleet and Wells Fargo).

Only two creditors, Providian and Capital One, have lowered rates during the same period, which still leaves Capital One's interest rate at a very high 15.9 percent.

Sears, which generally charges interest rates above 20 percent, continues to refuse to negotiate any discount. Bank of America, on the other hand, will completely eliminate interest for consumers in a DMP. Other creditors that charge relatively low rates are Chase Manhattan, at 7 percent, and Providian, at 8 percent.

The increasing refusal of creditors to offer significantly lower interest rates causes more consumers to drop out of credit counseling and to declare bankruptcy.

According to a survey by VISA USA, one-third of consumers who failed to complete a DMP said they would have stayed on if creditors had further lowered interest rates or waived fees. Moreover, almost half of those who dropped off a DMP had or were going to declare bankruptcy.”

In addition some banks are asking very intrusive questions, such as a list of assets you can sell to pay off debt, before making their decision. This is the type of information you should not be required to answer unless you file for bankruptcy.

A good credit counseling agency should first have you provide all the facts about you finances along with receipts. Their fees should be reasonable, not more than $50 to set up an account and no more that $25 - $30 a month after that. (They still get a good chunk of money from your creditors.)

You should receive a 30 to 90 minute counseling session and, if appropriate, a customized debt reduction plan. No payments on the plan should be required until after it has been accepted by all creditors.

Try to find an agency that you can deal with over the phone and that accepts electronic fund transfers from your bank. Also make sure that either you or the agency informs the creditors of the date your payment will be processed by the agency to avoid additional late fees and charges.

The good news is that most creditors will not hold it against you if you successfully complete your repayment plan. This means your credit rating should not be adversely effected.

How to Find a Good Credit Counselor

Ask friends and relatives for recommendations.

Check with the Better Business Bureau to see if complaints have been lodged against agencies you are considering.

Call and talk to several agencies before you make a decision.

You want to determine what fees you will have to pay, whether they are called voluntary or not.

You also want to know how much and what kind of counseling you’ll get and the qualifications of the counselor.

Avoid the hard sell. Make sure you are comfortable with the people you’re talking to and that what they say is credible. Don’t take exaggerated claims at face value.

If you’ve gone this far, you want to make sure you’re working towards a solution, not creating a further problem.

Bankruptcy Reform and Credit Counselors

Under the Bankruptcy Reform Act that took affect in October 2006, debtors must undergo credit counseling before filing. The counselor is supposed to determine whether you should file under Chapter 7 or Chapter 13 of the Bankruptcy Act.

This counseling costs $50 and is supposed to least 90 minutes. So far, the Department of Justice has approved the 71 agencies associated with the National Foundation for Credit Counseling to carry out this counseling, although other agencies are trying to get approved as well.

At first, it appeared that in many instances the counseling was either group counseling or counseling done over the phone. Experts questioned the value of this, especially since many filers can't afford the fee.

Hopefully now that the initial spate of filings caused by the reform act has passed, you will be able to bet a more helpful, face-to-face counseling session.

If you are forced to go through this procedure try to find a agency that will provide you with a worthwhile session, rather than just run you through a mill.

If you are in dire straits and need legal help, you can get a referral and free consultation from a qualified bankruptcy attorney by clicking the link.

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