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7 Questions You Absolutely Must Ask Any Credit Counseling Agency

 

One of the best ways to pay off debts is by going to a consumer credit counseling agency for help. If you choose a reputable non-profit agency it will cost you practically nothing to have your financial situation analyzed.

However, the key here is to pick a reputable credit counseling agency. To do so you will need to ask it these seven questions.

young business man on the phone, isolated on white

What are your services?

The best credit counseling agencies offer a wide variety of services, including budget counseling, classes in debt management and help with saving money. They also have counselors that are licensed in consumer credit, debt management and budgeting. Your counselor should discuss your total financial situation with you and then, if appropriate, offer you a debt management plan that will get your debts paid off and avoid other financial problems going forward. Beware of any agency that tells you that your only option is a debt management plan before its representative has thoroughly analyzed your financial situation.

What free information do you offer?

Stay totally away from any credit counseling organization that charges for information about its services. No reputable credit counseling agency does this.

Are you licensed in my state?

A number of states require credit counseling organizations to become licensed before they are allowed to offer debt management plans, credit counseling and other such services. Make sure that you don’t hire an organization that has not fulfilled your state’s requirements.

Will you provide me with a formal written agreement or contract?

Never agree to participate in a DMP over the phone. Get all agreements in writing. If you are offered a DMP be sure to read it very carefully before you sign it. If you feel pressured to agree to do something immediately, that’s a red flag. It would be best to stop talking to that organization and begin looking for another one.

What are your counselors’ qualifications?

Ask if the agency’s counselors are certified or accredited by an independent, outside company. If so, what was the organization that certified them? It’s important to choose an organization whose counselors were certified not by the agency itself but by an independent, outside organization.

What are your credit counseling fees?

Reputable credit counseling agencies generally charge a minimal fee to set up your account of maybe $25. It may also charge a monthly maintenance fee of $10 or so. If you’re quoted fees higher than this, then you may want to look for another credit counseling agency.

How will you keep my personal information secure?

Credit counseling organizations are like banks in that they will have a lot of your personal information including your name, phone number, address and, of course, your financial information. It’s important that they keep this information secure. Ask what safeguards it has in place to guard your information and prevent it from being misused.

What to expect with a DMP

If you and your counselor agree that your best option would be a DMP you will begin depositing money with the credit counseling agency each month. It will use this money to pay your lenders based on the payment schedule it negotiated with them Your creditors may agree to lower your interest rates or waive certain fees because you’re now on a DMP, which should mean lower monthly payments.

Three things you must do

There are three things you must do once your creditors have accepted your DMP. First, it’s critical that you make all of your monthly payments on time. Second, you will receive monthly statements you must read carefully so that you’ll know your creditors are being paid per your DMP. And third, if for some reason you won’t be able to make a scheduled payment you need to immediately contact your credit counseling agency. You also need to contacted immediately if you find your creditors are not being paid.

Why this is important

If you do not make payments on your DMP’s schedule, or if you find that your creditors are not being paid, you may lose whatever progress you’ve made in repaying your debt or the benefits of being in a DMP. If your payments are late, you probably won’t be able to have your accounts “re-aged” again, your credit report will have “late” marks and you’ll likely rack up late fees that will lead to even more debt.

This Week’s Free Debt Management Tip: The FAQs About Debt Management Plans

If you’re not familiar with a debt management program (DMP) it’s a repayment plan that allows you to make one monthly payment to a credit-counseling agency, which then distributes the money in individual payments to your creditors. The object of the debt management plan is to get your debts paid off. You also get lower interest rates and lower payments so that you should be able to get your debts paid off faster than you would without a DMP.

How does this work?

You will first meet with a debt counselor at the credit-counseling agency. He or she will work with you to determine how much you could afford to pay your creditors. The credit-counseling agency will send a proposal to your creditors asking that your monthly payments be lowered, your interest rates reduced and your monthly payments lowered to what you can afford. If your creditors agree to this proposal and provide the requested benefits you should be able to get your unsecured debts paid off completely and much quicker than you would be able to on your own.

What does it take to be successful with a  DMP?

The success of your debt management program will depend entirely on you making your monthly payments, not using your credit cards, not opening any new accounts and making better financial decisions.

How much does a DMP cost?

Most credit counseling agencies charge nothing for your initial consultation. However, you may then be charged what’s called a “maintenance” fee that could be $20 or $25 a month. This fee will most likely be added to your monthly payment so you won’t have to pay it separately.

Would a debt management plan be right for me?

Generally speaking the people who can profit most from a debt management plan are those who have fallen behind on paying their bills or have suffered a serious change in their finances such as a divorce, losing a job or a serious illness. In many cases, a DMP would be a better option than filing for bankruptcy. However, there may be other options that would better fit your situation. For example, if you own your home you might be able to get a home equity loan or a homeowner’s equity line of credit and pay off your bills. The problem with getting a loan is this doesn’t require you to change any of your spending habits so you could ultimately end up in worse shape than before.

Another possible solution would be to do a balance transfer. However, this has the same downside as getting a loan – it doesn’t reduce your debt nor does it help you change the way you manage credit

Is a DMP a loan?

No, a DMP does not involve any kind of a loan. Instead, it’s a program where you make one payment to the credit counseling agency and it then dispenses the money to your creditors. If your creditors approve your DMP you should be debt free in three to five years.

What types of debt could I include in my DMP?

You can include any types of unsecured debts such as collection accounts, credit cards, medical bills, personal loans, department store cards, old disconnected utility and telephone bills and gas cards. However, it is not possible to include any secured or collateralized debt such as your car, home, boat or motorcycle.

Could I include business credit cards in my DMP?

In most cases the answer to this would be No. There are some credit card issuers that will allow this but in most cases business credit cards are considered to be secured debts. Your creditors relied on your business financial statements when they granted you credit. As a result, they will not allow you to include this is in your DMP.

Will a DMP have an effect on my credit?

Most credit-counseling agencies will tell you that they cannot make any representation about what a DMP will do to your credit score or credit reports. Your credit standing could be enhanced, damaged or not changed at all.

Could I continue to use my credit cards?

The answer to this is also a No. When your creditors accept your DMP it’s with the understanding that you will not continue to increase your debt. Any accounts you put in the program will be closed or inactivated by your creditors if you don’t do this yourself. If there is some reason why you feel you need a card for emergency reasons your best solution would be to get a prepaid card. However, once you complete your DMP most creditors will allow you to reactivate your accounts.

How To Get Out Of Debt

To learn how to get out of debt you need to understand a few things. You have to know how much your debt is costing you. You have to know your debt management options. You have to know your income and expenses. You have to know what you can afford to pay towards your credit card debts, medical bills, student loans, and IRS tax debts each month to hopefully one day become debt free.

Getting out of debt is not easy. Some debt management plans are quicker than others but neither is totally painless. Sorry there is no quick fix solution that will wipe out your debts in a matter of days. Any company promising such fast debt relief is a scam and should be avoided.how to get out of debt

As you can see on most of the other personal finance bloggers out there getting out of debt starts with spending less than you earn. If your expenses exceed your income and you have to pull out your credit card to charge groceries at the end of the month you will not be paying off your debts anytime soon.

You can start looking at your income and expenses with these links to free budget worksheets. Knowing how much you are spending each month is the first step. Stop spending so much money on the latest iPhone, iPad, iPod, or Android smartphones. You can work on paying off your debts first and then get the latest iPhone 6 or iPad 4 when they come out in a couple years.

Once you have your personal budget printed out it’s time to start cutting expenses and working on increasing your income.

Let’s talk about cutting expenses first. When was the last time you shopped for car insurance? Home insurance? You see all those funny TV commercials because they want your business. You can get quotes online and possibly save $50 to $100 bucks each month with a new company.

How about trimming down the cable bill and using Netflix or other streaming video service more?

We also talked about DIY auto repairs to save money.

Can you hold off on buying a new car or truck for a year or two? How about getting a certified preowned and saving several thousand dollars compared to buying new? You’ll have a much lower monthly payment which you can use towards paying off your credit card bills, medical bills, student loans and IRS tax debts.

There are many ways you can look at trimming expenses. You can sacrifice for a short while to get your finances in order and then once you have wiped out your debts you can live a little. Just like what Dave Ramsey teaches.

Now let’s talk about increasing your income to get out of debt.

If you cannot get more hours at your current job then it’s time to start working a second job or doing freelance work.

Just because the unemployment rate is around 8% does not mean there are not job opportunities out there.

As a part time employee or freelancer you would cost a potential employer less than if they hired you full time. They would not have to provide you with benefits. You can get a $8 to $10 an hour job working 20 hours a week during your evenings or weekends and that’s an extra $200 a week or $800 a month to pay off your debts.

That’s about $10,000 per year working only 20 extra hours a week. Would you be willing to work an extra 20 hours a week to pay down $10,000 more in credit card debt this year?

That’s the secret to getting out of debt – spending less than you earn. Trim your expenses, increase your income and in a few short years you could be completely debt free. Now you know how to get out of debt.

Compare Debt Management Plan Costs

When you are thinking about signing up with a debt management plan you need to consider how much it will cost you to proceed with that plan. There is no point thinking about a debt management plan if you cannot afford the upfront or monthly cost right?

Compare Debt Management Plan Costs

So let us compare the costs of credit counseling, debt consolidation, do it yourself debt settlement, hiring a debt settlement firm and filing chapter 7 and chapter 13 bankruptcy as these are the most popular ways people use to resolve their debt problems.

Non profit consumer credit counseling may or may not charge an upfront fee or signup fee. Usually this is around $50 or less. And then you have a monthly service fee for the agency to manage your payment and disburse it to your creditors. This usually runs $50 a month or less. There are several that have a service fee at $25 a month.debt management plan costs

Debt consolidation comes in many flavors so there is one way to show you all the possible costs unfortunately. You can choose a home equity line of credit. You can consolidate without using a new debt consolidation loan but just working with  a third party that will manage your bill payments for you (CareOneCredit does this).

Another way to consolidate is to get a new loan and transfer all your balances to the new card with a lower interest rate. Many of the loan options depend on how good or bad your credit is. If you have good credit you can get a good interest rate and save money possibly unless you start racking up more debt. If you have bad credit you may not get approved for a home equity line of credit or debt consolidation loan at all.

As an example if you have $40,000 in credit card debt at a 19% APR and you were able to get a loan at 10% for 48 months your payment would drop from $1196 a month to $1015 a month. So you possibly save almost $200 a month if you can stick to a rigid 48 month repayment plan and do not charge anything else.

Taking a look at the costs of do it yourself debt settlement, there is a course called Zipdebt which offers coaching through the entire debt settlement process along with debt settlement letter reviews. You can get 6 months of coaching and document review for $397 plus S&H and there are no other costs. You can learn how to settle your debts for as low as 20 cents on the dollar in 6 to 18 months.

Hiring a debt settlement firm will not cost you anything upfront anymore thanks to the FTC but you will have to pay at the end when they are able to settle your debts with the creditors. A debt settlement firm will ask for 10 to 25% of the amount saved through the debt negotiation process. So for example you have $10,000 in credit card debt and they get a settlement of 50%. They saved you $5000 and will ask for $500 to $1250 as their success fee. This is just an example. But this is now how debt settlement companies work – on a contingency fee basis. They only get paid when they are able to successfully settle your credit cards.

A debt expert from UK debt management company Gregory Pennington commented that no-one should enter a debt management plan unless they feel the fees are reasonable.

The costs of bankruptcy filings have gone up as more and more people have been forced to go down this road. The cost of just filing for chapter 7 or chapter 13 bankruptcy is around $300. Then you have to add in the attorney fees because you are strongly encouraged to hire a bankruptcy attorney to file. The average attorney cost for chapter 7 is $1000 so that gives you about $1300 for chapter 7.

The average attorney cost for chapter 13 is $2500 so that gives you about $2800 for chapter 13.

So now you have a quick rundown of what it may cost for the popular debt management plans you may be considering. You need to factor these costs into your debt calculations when you decide on how to want to proceed to take care of your debts.