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About Credit Counseling and Debt Consolidation
Credit Counseling: If you're not disciplined enough to create a workable budget and stick to it, can't
work out a repayment plan with your creditors, or can't keep track of mounting bills, consider contacting
a credit counseling organization. Many credit counseling organizations are nonprofit and work with you
to solve your financial problems. But be aware that, just because an organization says it's "nonprofit,"
there's no guarantee that its services are free, affordable, or even legitimate. In fact, some credit
counseling organizations charge high fees, which may be hidden, or urge consumers to make
"voluntary" contributions that can cause more debt.
Most credit counselors offer services through local offices, the Internet, or on the telephone. If possible,
find an organization that offers in-person counseling. Many universities, military bases, credit unions,
housing authorities, and branches of the U.S. Cooperative Extension Service operate nonprofit credit
counseling programs. Your financial institution, local consumer protection agency, and friends and family
also may be good sources of information and referrals.
Reputable credit counseling organizations can advise you on managing your money and debts, help you
develop a budget, and offer free educational materials and workshops. Their counselors are certified
and trained in the areas of consumer credit, money and debt management, and budgeting. Counselors
discuss your entire financial situation with you, and help you develop a personalized plan to solve your
money problems. An initial counseling session typically lasts an hour, with an offer of follow-up sessions.
Debt Management Plans: If your financial problems stem from too much debt or your inability to repay
your debts, a credit counseling agency may recommend that you enroll in a debt management plan
(DMP). A DMP alone is not credit counseling, and DMPs are not for everyone. You should sign
up for one of these plans only after a certified credit counselor has spent time thoroughly
reviewing your financial situation, and has offered you customized advice on managing your
money. Even if a DMP is appropriate for you, a reputable credit counseling organization still can help
you create a budget and teach you money management skills.
In a DMP, you deposit money each month with the credit counseling organization, which uses your
deposits to pay your unsecured debts, like your credit card bills, student loans, and medical bills,
according to a payment schedule the counselor develops with you and your creditors. Your creditors
may agree to lower your interest rates or waive certain fees, but check with all your creditors to be sure
they offer the concessions that a credit counseling organization describes to you. A successful DMP
requires you to make regular, timely payments, and could take 48 months or more to complete. Ask the
credit counselor to estimate how long it will take for you to complete the plan. You may have to agree not
to apply for or use any additional credit while you're participating in the plan.
Protect Yourself
Be wary of credit counseling organizations that:
charge high up-front or monthly fees for enrolling in credit counseling or a DMP.
pressure you to make "voluntary contributions," another name for fees.
won't send you free information about the services they provide without requiring you to provide
personal financial information, such as credit card account numbers, and balances.
try to enroll you in a DMP without spending time reviewing your financial situation.
offer to enroll you in a DMP without teaching you budgeting and money management skills.
demand that you make payments into a DMP before your creditors have accepted you into the
program.
Debt Consolidation
You may be able to lower your cost of credit by consolidating your debt through a second mortgage or a
home equity line of credit. Remember that these loans require you to put up your home as collateral. If
you can't make the payments or if your payments are late you could lose your home.
What's more, the costs of consolidation loans can add up. In addition to interest on the loans, you may
have to pay "points," with one point equal to one percent of the amount you borrow. Still, these loans
may provide certain tax advantages that are not available with other kinds of credit.
Bankruptcy
Personal bankruptcy generally is considered the debt management option of last resort because the
results are long-lasting and far-reaching. A bankruptcy stays on your credit report for 10 years, and can
make it difficult to obtain credit, buy a home, get life insurance, or sometimes get a job. Still, it is a legal
procedure that offers a fresh start for people who can't satisfy their debts. People who follow the
bankruptcy rules receive a discharge a court order that says they don't have to repay certain debts.
There are two primary types of personal bankruptcy: Chapter 13 and Chapter 7. Each must be filed in
federal bankruptcy court. The filing fees run about $185 for Chapter 13 and $200 for Chapter 7. Attorney
fees are additional and can vary.
Chapter 13 allows people with a steady income to keep property, like a mortgaged house or a car, that
they otherwise might lose. In Chapter 13, the court approves a repayment plan that allows you to use
your future income to pay off a default during a three-to-five-year period, rather than surrender any
property. After you have made all the payments under the plan, you receive a discharge of your debts.
Known as straight bankruptcy, Chapter 7 involves liquidation of all assets that are not exempt. Exempt
property may include automobiles, work-related tools, and basic household furnishings. Some of your
property may be sold by a court-appointed official a trustee or turned over to your creditors. You
can receive a discharge of your debts through Chapter 7 only once every six years.
Both types of bankruptcy may get rid of unsecured debts and stop foreclosures, repossessions,
garnishments, utility shut-offs, and debt collection activities. Both also provide exemptions that allow
people to keep certain assets, although exemption amounts vary. Note that personal bankruptcy usually
does not erase child support, alimony, fines, taxes, and some student loan obligations. And unless you
have an acceptable plan to catch up on your debt under Chapter 13, bankruptcy usually does not allow
you to keep property when your creditor has an unpaid mortgage or lien on it.
Debt Negotiation Programs
Debt negotiation differs greatly from credit counseling and DMPs. It can be very risky, and have a long
term negative impact on your credit report and, in turn, your ability to get credit. That's why many states
have laws regulating debt negotiation companies and the services they offer. Contact your state
Attorney General for more information.
The Claims
Debt negotiation firms may claim they're nonprofit. They also may claim that they can arrange for your
unsecured debt typically credit card debt to be paid off for anywhere from 10 to 50 percent of the
balance owed. For example, if you owe $10,000 on a credit card, a debt negotiation firm may claim it
can arrange for you to pay it off with a lesser amount, say $4,000.
The firms often pitch their services as an alternative to bankruptcy. They may claim that using their
services will have little or no negative impact on your ability to get credit in the future, or that any
negative information can be removed from your credit report when you complete their debt negotiation
program. The firms usually tell you to stop making payments to your creditors, and instead, send
payments to the debt negotiation company. The firm may promise to hold your funds in a special
account and pay your creditors on your behalf.
The Truth
Just because a debt negotiation company describes itself as a "nonprofit" organization, there's no
guarantee that the services they offer are legitimate. There also is no guarantee that a creditor will
accept partial payment of a legitimate debt. In fact, if you stop making payments on a credit card, late
fees and interest usually are added to the debt each month. If you exceed your credit limit, additional
fees and charges also can be added. This can cause your original debt to double or triple. What's more,
most debt negotiation companies charge consumers substantial fees for their services, including a fee
to establish the account with the debt negotiator, a monthly service fee, and a final fee of a percentage
of the money you've supposedly saved.
While creditors have no obligation to agree to negotiate the amount a consumer owes, they have a legal
obligation to provide accurate information to the credit reporting agencies, including your failure to
make monthly payments. That can result in a negative entry on your credit report. And in certain
situations, creditors may have the right to sue you to recover the money you owe. In some instances,
when creditors win a lawsuit, they have the right to garnish your wages or put a lien on your home.
Finally, the Internal Revenue Service may consider any amount of forgiven debt to be taxable income.
Damage Control
Turning to a business that offers help in solving debt problems may seem like a reasonable solution
when your bills become unmanageable. But before you do business with any company, check it out with
your state Attorney General, local consumer protection agency, and the Better Business Bureau. They
can tell you if any consumer complaints are on file about the firm you're considering doing business with.
Ask your state Attorney General if the company is required to be licensed to work in your state and, if
so, whether it is.
Some businesses that offer to help you with your debt problems may charge high fees and fail to follow
through on the services they sell. Others may misrepresent the terms of a debt consolidation loan, failing
to explain certain costs or mention that you're signing over your home as collateral. Businesses
advertising voluntary debt reorganization plans may not explain that the plan is a Chapter 13 bankruptcy,
tell you everything that's involved, or help you through what can be a long and complex legal process.
In addition, some companies guarantee you a loan if you pay a fee in advance. The fee may range from
$100 to several hundred dollars. Resist the temptation to follow up on these advance-fee loan
guarantees. They may be illegal. It is true that many legitimate creditors offer extensions of credit
through telemarketing and require an application or appraisal fee in advance. But legitimate creditors
never guarantee that the consumer will get the loan or even represent that a loan is likely. Under the
federal Telemarketing Sales Rule, a seller or tele-marketer who guarantees or represents a high
likelihood of your getting a loan or some other extension of credit may not ask for or accept payment
until you've received the loan.
You should be cautious of claims from so-called credit repair clinics. Many companies appeal to
consumers with poor credit histories, promising to clean up credit reports for a fee. But you already
have the right to have any inaccurate information in your file corrected. And a credit repair clinic cannot
have accurate information removed from your credit report, despite their promises. You also should
know that federal and some state laws prohibit these companies from charging you for their services
until the services are fully performed. Only time and a conscientious effort to repay your debts will
improve your credit report.
If you're thinking about getting help to stabilize your financial situation, do some homework first. Find out
what services a business provides and what it costs, and don't rely on verbal promises. Get everything
in writing, and read your contracts carefully.
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