Repairing Your Credit – How Does Credit Counseling Work?

Have you ever found yourself overwhelmed by the pile of credit card bills sitting in front of you? For those of us that have experienced an overwhelming amount of credit card debt know that this type of stress can be the most traumatic experience that an individual can go through. Getting in credit card debt is a slippery slope, it usually starts with one card and one purchase but it can quickly turn into a sandtrap where the minimum payments are similar to putting a Band-Aid on a hemorrhaging wound.

When we find ourselves at the helm of a ship drowning in a sea of credit card debt there are organizations that we can turn to, and with a little due diligence and articles such as the one your reading right now can help yo navigate you to safe waters, and get you on the path to financial freedom. Credit counseling is one of those organizations that fall under the “debt solutions” category and out of all the different solutions and organizations that could assist you in time of financial crisis credit counseling will probably give you the most bang for your buck.

It was first established in the 1950’s when creditors created the National Foundation for Credit Counseling or NFCC for the purpose of, according to the W. Patrick Boisclair, Chairman of the NFCC, “the NFCC initially monitored legislative and regulatory activity for its retail credit members” and “also conducted public awareness campaigns on credit.” Their mission statement reflected an objective to help the American consumer avoid bankruptcy and keep them educated on fiscal responsibility. In 1993 another organization was established called the “Independent Consumer Credit Counseling Agencies,” or AICCCA, stating that there was a need for, “industry…standards of excellence and ethical conduct.” In 2005 the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 made counseling a requirement 180 days prior to filing bankruptcy.

So now credit counseling has been such an integral part of financial health when facing the prospect of bankruptcy that now there are approximately 300 organizations that offer credit counseling in the US. Previous to choosing one of these organizations to assist you, let’s get a better grasp on what credit counseling is and how we can benefit from this breakthrough methodologies.

The main goal of credit counseling, if you walk away with anything, would be to educate you on credit card debt, and how you can avoid being swamped underneath a mountain of credit card debt. Another big part of the process is the credit counselor is involved with the negotiation of better terms across your unsecured credit card debt, which translates to lower rates and lower overall debt. Most likely, you will find yourself enrolled in a debt management plan (or DMP).

The DMP

The debt management plan is another huge benefit of enrolling into counseling. A DMP is fairly simple, after your enroll in the DMP, and the credit counselor negotiates lower interest rates you close your accounts, and stop making your monthly payments directly to your creditors and begin paying the agency one payment who will disburse the funds according to the terms of the DMP.

Many counseling agencies tout some significant savings and advertise that they cut your debt by 50%-60% and you will be “debt free’ in little as two years. Realistically the industry average is you will be able to cut your debt by 20% and the DMP usually has a turnaround of about 4 years to be completely free of your debt.

Another benefit of enrolling in a DMP is the lowering of interest rates. The interst rate on a credit card that has been defaulted on is usually in the range of 30% to 50%, after enrolling in a DMP, a seasoned credit counselor can negotiate a lower interest rate where your payments will be a more manageable dollar amount reflecting your income.

Credit Counseling Scams

Unfortunately there are some fly by night credit counseling agencies that are seriously lacking in the ethics department. There are some red flags, or signals, that you should be cognizant of on your search for an agency.

Some of the more obvious red flags are:

They refuse to give any references or contact information to testimonials.
They promise that they can lower your debt in by a ridiculous amount in a ridiculous amount of time.
Poor rating on the BBB or several poor reviews on the internet.
You received an unsolicited email or phone call from them.

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Consumer Credit Counseling Service

Consumer Credit Counseling Service

Legitimate consumer credit counseling services are not easy to find, as many of them have come under public wrath of late. A common criticism about credit counseling is that participating in such a plan ruins a consumer’s credit which also has led to charges that credit counseling is a marketing gimmick the lending industry makes use of. Probably it is for this reason the experts opine that credit counseling is ineffective. But one must not forget that credit counseling is not the same as debt consolidation.

In the forefront is the Christian credit counseling which is making a difference in this field not just by demonstrating genuine intentions but also by offering credit counseling in an affordable way to consumers. It helps consumers take steps to improve their credit.

A consumer credit counseling service has the goal educating debtors of different consolidation ways. Of which the secured debt credit is the one with which you can avoid unnecessary additional clerical costs and also prevent legal actions against you. In short credit counseling is designed to persons who are neck deep in debt.

The Statutory Bindings

If you are looking for information on nonprofit credit counseling agency Christian credit counseling is your natural first choice. Like all nonprofit organizations they have an obligation to educate and counsel the needy people. All nonprofit credit counseling agencies are bound by nonprofit corporation statutes and comply with state charitable solicitation laws. This is why nonprofit credit counseling agencies provide free services or at least charge minimal fees to recover their cost. It helps to keep in mind that appropriate Federal and Senate committees have taken cognizance of the profitable nature of some of the nonprofit credit counseling agencies.

In fact, for more than five decades now, nonprofit credit counseling organizations are helping consumers. Those providing assistance to consumers credit counseling and debt management services must keep your private information confidential. Rules are put in place to limit the fees a nonprofit credit counseling firm charge their clients. Californian licensed nonprofit credit counseling firms must file their financials with the statutory agencies regularly.

However, some community credit counseling services are setting precedence and are taking their services beyond expectations. If you act sensibly you can actually get free counseling and debt consolidation advice from them.

Here Are Some Helpful Steps

List out all community based and nonprofit credit counseling services.
Checkout their accreditations and business histories through their websites and testimonials.
Talk to them before signing any documents.
Don’t leave anything to ambiguity; get their and your obligations in writing.
Take help from The National Foundation for Credit Counseling for researching about some credit counseling organization.

You must always remember, at the back of your mind that, credit counseling is a legal and ethical alternative to file bankruptcy. In any case, credit counseling is a viable option before meeting a bankruptcy attorney. For an industry having more than its share of questionable reputation, at least this is the only way out. In addition, for those consumer credit counseling agencies in the for-profit side of the industry, the problem is that the fees are rather too high and typically take long times to clear off the debt. However, the bottom line is credit counseling is still best if you want a total makeover of your finances.

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A Look Inside Debt Consolidation Credit Counseling

One of the biggest questions is, how does debt consolidation credit counseling work?

A nonprofit credit counseling agency that abides by state regulations and creditor guidelines will begin with a free counseling session reviewing your financial addendum.

A financial addendum is an outline of your debt to income ratio on a monthly basis, assets and liabilities. This is also known as a household budget. A certified credit counselor reviews your monthly expenses versus your income to properly assess a monthly payment for your credit counseling plan that is affordable and falls on a due date that comfortably fits within your other bills and pay schedule.

This is done first to help consumers identify where they are currently with their finances and help establish where they want to go long term with their goals. A financial addendum also helps your credit counselor qualify you for a monthly payment that you can easily manage and ensures a successful completion of your program. Some creditors utilize the financial addendum to determine how much interest will be reduced.

From there, a credit counselor will then ask for the accounts you want to enroll, names and current balances. This data is used to find out what your monthly payment will be on the debt consolidation plan. The monthly payment is based on pre-established creditor guidelines nonprofits must abide by for their clients to receive program benefits such as interest reductions and the stopping of fees.

Eventually a credit counselor will want to review your statements for current fees, finance charges, and due dates in an effort to compare to the rates on the program and show the potential savings with enrollment.

At this point, a certified counselor should have provided you a budget analysis of your financial addendum, a breakdown of the total monthly payment in the program, and the potential difference in the savings between your current terms and the proposed modified terms under a nonprofit credit counseling plan. You now have a solid accounting of where you are, where you want to be, and how you can get there with a debt consolidation program.

If the payment is affordable and the savings are there and proven it is then time to select a payment date to begin your plan. Once you select a date and have committed to a plan a credit counselor should then send you any paperwork to finalize an agreement and working relationship between you and the agency to manage your debts.

After you have submitted your paperwork it is then recommended to make one last call to your creditors and close the accounts as – closed by account holder- rather than the creditor closing the account in the enrollment process. Whoever closes the account should not affect your actual credit score however some lenders may use such verbiage on your credit report to justify charging you a higher interest rate on a loan.

Keep in mind: There are some things that do hurt your credit and some things that do not that a lender will try and use to justify higher rates and fees from the affiliated banks and agencies.

Once you are enrolled in the program the credit counseling agency should be handling any communiqu├ęs with your creditors on your behalf and providing you updates as needed with regard to the status of your accounts enrolled in the program.

35 percent of your credit score is factored by timely payments every billing cycle. Another 30 percent is accounted by the amount of debt you owe. A debt consolidation credit counseling plan helps improve your credit in these two areas each billing cycle, building your credit score while lowering your debt amounts.

You see, as long as you make your payment each month a true nonprofit credit counseling agency will in turn then disburse funds to your creditors each and every month, satisfying the demand for 35 percent of your credit score, timely payments.

As your interest rates are reduced from their original rates your regular monthly payment through the credit counseling agency then applies more to the principle than the finance charges each month, bringing your balances down much faster than paying it on your own at high interest rates. This reduces the amount of debt you owe faster and further assists that 30 percent factor of your credit score in a positive direction.

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Are You In Need of Credit Counseling?

If you are inundated with debt you could be experiencing potentially the most stressful event that an individual can go through. Debt can wreak havoc on a marriage, bring about emotional pain and your money problems could lead to some physical ailments from the stress that you are experiencing. Luckily there are organizations, like a credit counseling agency, that you can turn to help you through these financial hardships and lead you towards the path of financial independence.

How can a credit counselor help?

One of the main goals of a credit counselor is to negotiate better terms with your creditors. A credit counselor will also try to enroll a consumer in a debt repayment plan, which can be used as a tool as you approach creditors to get better terms on your accounts.

What exactly is a debt repayment plan or debt management plan?

A debt repayment plan is pretty self explanatory, the credit counseling agency is the distributor of the consumer’s funds to their creditors according to the negotiation. The consumer now pays the credit counseling agency that will distribute the client’s monthly payments according to the newly arranged terms negotiated with the creditors.

Within the negotiation process, one of the main objectives in credit counseling is to negotiate lower interest rates for their consumers. Once the lowest possible interest rate has been negotiated, the agency will distribute the funds paying off the highest interest rate debts first to keep them from stacking up even more debt. The debt management plan has worked for thousands of people but it’s not for everybody. You really have to ask yourself if you really need credit counseling and evaluate if you would be better off doing all this yourself.

The main problem with taking care of your debt yourself-without the help of a credit counselor-is that many times a credit counselor knows how to negotiate with each individual creditor. For example, Capital One is notorious for not working with debt settlement organizations but they do occasionally work with credit counseling. There is the obvious benefit of working with a credit counselor that is proficient in dealing with creditors and knows what to and what not to say. The bottom line is, it is an asset for an individual to get helped from a seasoned negotiator. It’s similar to court; can you represent yourself in a court of law? The answer is yes, but in a high stakes case like you future livelihood, you probably want somebody with expertise in their field to help you.

Why credit counseling?

You really should do your due diligence before you make any major financial decision, same goes for credit counseling. You should probably seek the guidance of professional if you can answer yes to one or more of the following questions:

Is your debt situation starting to affect your relationships?
Has any lender ever denied you of credit?
Are you getting harassing phone calls from creditors that are getting out of control?
You are finding it hard to cope with your debt?

If you have made the decision to obtain credit counseling keep in mind that you have to also do your due diligence on the organization and make sure that they have their scruples intact. It would probably be in your best interest to seek out a non-profit credit counseling agency, but even the non-profits can be a scam so make sure that they are a member of the National Foundation for Credit Counseling (NFCC) or the Association of Independent Consumer Credit Counseling Agencies (AICCCA).

It’s also probably best if you ask for references. Any organization that you’re looking to do business with should provide at least one reference, if they don’t provide any references immediately or dodge the questions in any which way that should be a definite red flag. You should also check out the Better Business Bureau, or your State Attorney General’s office for any cases or complaints filed against the organization in question.

Another thing worth checking is always ask about their fees and make sure that they are forthright in their dealings as far as their fees are concerned. Most legitimate credit counseling agencies don’t ask for an upfront fee, but most have a suggested monthly donation when you are enrolled in a program.

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How Credit Counseling During Personal Bankruptcy is Different in Canada and the United States

Credit counseling became part of the bankruptcy process in the United States with the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. As a result of this legislation, your Chapter 7 or Chapter 13 bankruptcy case will be dismissed if you cannot prove that you completed a credit counseling session, with an approved credit counselor, within the preceding 180 days.

In other words, in the United States, your bankruptcy will not start until you can prove that you have completed credit counseling.

This is in direct contrast to the personal bankruptcy system in Canada, where credit counselling (yes, in Canada we spell it with two l’s) is an integral part of the bankruptcy process, but it is completed during the bankruptcy, not before you file.

It appears that the American bankruptcy reform in 2005 was championed largely by large credit card companies and other lenders, and they argued in favor of the credit counseling requirement primarily, it would appear, as a way to talk people out of filing bankruptcy. The mandatory pre-bankruptcy credit counseling session, among other things, discusses alternatives to bankruptcy. Since credit counselors do not also serve as bankruptcy attorneys, it is logical to assume that they will, at the very least, make sure all debtors are fully aware of their non-bankruptcy options.

In Canada, the process is somewhat different. First, all bankruptcies are handled by private individuals, generally with an accounting background, who are licensed by the federal government. In Canada, practicing lawyers are not permitted to act as trustees in bankruptcy. The trustee handles all aspects of the file, including collecting assets from the debtor, and distributing the proceeds to creditors.

In Canada, prior to filing a consumer proposal (similar to a Chapter 13 filing in the United States) or a personal bankruptcy (similar to Chapter 7), the debtor is required to meet with a licensed trustee in bankruptcy, and the trustee is required to explain to the debtor all of their options, including such non-legislative options as debt consolidation and debt management plans through a credit counselor. The debtor then decides whether or not they will file bankruptcy.

During the bankruptcy (or proposal) the debtor is required to attend two credit counselling sessions.

The first credit counselling session discusses money management, spending and shopping habits, warning signs of financial difficulties, and obtaining and using credit.

The second stage credit counseling session is designed to determine the causes of the insolvency, and to provide the debtor with the skills necessary to avoid future financial problems. The credit counselor will follow up on the principles discussed in the first session, and then help identify non-budgetary causes of financial problems (such as marriage break up, job loss, family problems, excessive gambling, compulsive behavior, and substance abuse).

In contrast to the American system where pre-bankruptcy credit counseling appears designed to talk people out of going bankrupt, the Canadian bankruptcy credit counselling system is designed to help debtors avoid financial problems in the future.

Obviously as a Canadian bankruptcy trustee I am somewhat biased, but given my experience with the over 3,000 personal bankruptcies and consumer proposals that I have personally handled, I can say with confidence that in most cases the debtors viewed the credit counselling sessions as a positive experience. Many people over the years have told me that they learned many money management skills, and the vast majority of people I have helped over the years don’t go bankrupt again, so I believe the Canadian credit counselling system works.

The American system has only been in place for a short period of time, so perhaps in a few years a comparison will be done of both credit counseling systems to determine which approach is most beneficial to people with money problems.

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