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PERSONAL FINANCE

Debt Management Services

Written by Kevin Smith

If you find yourself over your head in debt, there is always a light at the end of the tunnel. Credit
counseling agencies, both for-profit and non-profit, exist in every state to help people build a
clear, workable path back to a healthy personal financial situation.

If you do need the help of a credit counselor, this is what you can expect.
What is Credit Counselling?

Credit counseling is a service offered to help people bring their personal finances under control.
A large part of what credit counselor involves is purely educational, usually with many free
resources available. Just like your health, big problems are best addressed with prevention before
the problem gets out of control. If you are reading this, you are already working through some
course work that would be similar to what would be offered by a credit counseling agency.

Unfortunately, most people reach out for help only after debts start to spiral out of control. At
this point, you will need to meet one-on-one with a credit counselor to chart a path forward and
get yourself out of debt.

There are three main tools applied by credit counseling agencies before bankruptcy enters the
discussion: budget building, debt management planning, and debt settlements.

Who are Credit Counselors?

Credit counseling is loosely regulated by FINRA, the Financial Industry Regulatory Agency,
which sets rules for what can be advertised and advised. Reputable credit counselors have a
professional certification, usually through the NFCC, the National Foundation of Credit
Counselors.

There are both for-profit and non-profit credit counselors.  The NFCC usually works with non-
profit institutions. The cost of getting credit counseling will vary from agency to agency, but it
usually starts with a flat fee for your initial consultation, plus a percentage of the total debt
settled if you require more help.

Budget Building

Building a budget is the first step when working with a credit counselor. You will usually sit
down for a 1 or 2 hour meeting to discuss your current financial situation. This includes
reviewing your total debt load, income, expenses, and how you are currently spending your
money.
our counselor will review your financial information with you and recommend some educational
materials or courses that present some advanced techniques for discharging your debt as quickly
and cheaply as possible. They will also work with you to build a new budget based on what you
can afford.

How Is This Different from My Own Spending Plan?

If you already have a strong budget or spending plan and have simply fallen behind on payments
because of emergencies or income loss, this step of the process may not tell you more than you
already know.

Statistically, most people do not have a budget or a spending plan in place that gets reviewed and
updated with any regularity. One of the biggest advantages of speaking to a credit counselor is
that this is a completely unbiased third party who is working to get you out of debt. The
counselor will help create a stronger budget, based purely on facts and figures, not influenced by
emotion or panic. Working with a certified credit counselor is also a good way to learn about tax
incentives, subsidies, or other debt relief programs in your state that you may not be aware of.

Debt Management Planning

If your debt problems cannot be addressed by revising your budget, the next step is creating a
debt management plan.

With a debt management plan, your credit counselor will work directly with most of your
creditors, usually excluding secured loans like mortgages and car loans. Your credit counselor
will negotiate to get as many late fees and finance charges waived as possible and will set up
regular monthly payments to pay off the debt.

Instead of paying your creditors directly, you now make one monthly payment to your credit
counseling agency, who then distributes that payment to each creditor according to the terms
they negotiated.
Debt Management Plan and Debt Consolidation

Debt management planning is superficially like debt consolidation, where you take out one big
loan to pay off many smaller debts. Debt consolidation is often also part of the credit counselling
process, and your credit counselor will be able to help decide if it should be part of your payment
plan.

When you work with credit counselors, their goals are to help you repay your debt as fast and
cheaply as possible. They usually discourage taking out additional loans, unless that is the only
option available to preserve your credit rating.

Advantages of Debt Management Plans

In theory, your debt management plan will not be very different from something you could build
yourself, if you are able to successfully negotiate with your creditors.  However, it does have
some distinct advantages:

 Experienced Negotiators. Your credit counselor is a professional credit negotiator, and so

he/she knows the right buttons to push to get your fees lowered as much as possible.
 Relationship with Creditors. Your credit counselors already have established channels of
communication with most creditors, so they know exactly who to talk to in order to get things
moving forward. This can include things such as changing payment due dates to get everything
all on one schedule.
 Leverage with Negotiations. When your credit counselor is in contact with your creditors, your
creditors know that you are in a tight spot financially and are not making up some story over the
phone. Your creditors are not interested in driving you into bankruptcy, since that means they
do not get paid. They usually are more flexible when negotiating with credit counselors
compared to when you speak with them directly.
 Clear Reporting. Your credit counselor will send you monthly reports about the exact status of
all your debts, including how quickly each is being paid off.
 Lower Total Payments. In the lesson on juggling bills, we showed that it can be cheaper to pay
off some bills completely instead of making minimum payments on everything. Your credit
counselor knows this too.  He/she will optimize the payment schedules to pay off the most
expensive debts the fastest, minimizing the total amount you need to pay.

Restrictions of Debt Management Plans

Debt management plans are not always a simple solution, and they may require some tight
restrictions on what you can and cannot do.

 No New Credit. When you enter a debt management plan, it appears on your credit report. (It
doesn’t affect your credit history or your credit score.  It just shows that you agreed to a debt
management plan.)  This serves as a warning to creditors that you should not be extended any
new credit. If you do get a new line of credit anyway, your credit counselor will terminate your
debt management plan, putting you back at square one.
  Cancel All Credit Cards. Most household debt that requires credit counseling comes from credit
cards. Debt management plans require you cancel all open credit cards and stipulate that you
cannot open new ones until your current debt is paid off.
 Tricky Relationship with Creditors. Just because you are using a debt management service does
not mean your creditors will stop calling. Once you are on a plan, most credit counselors will
advise you to cease all communication with your creditors.  If one calls, you should provide the
creditor with the credit counselor’s name and number and let him/her handle it. If you do speak
with your creditors and say something that conflicts with the negotiations your counselor has
been working on, it could sink your whole plan.

Debt Settlement

If your level of income will not allow you to pay off your debt reasonably by using a debt
management plan, the next step is debt settlement. With debt settlement, your credit counselor
will set up a monthly payment plan for you, but instead of paying your creditors, the money they
receive from you goes into a separate savings account.  Then the counselor enters into “hardball”
negotiations.  The position they take with your creditors is that you are on the verge of
bankruptcy, and your creditors can either reduce the total amount owed to something you can
afford or risk not getting paid at all if you go bankrupt. Once your creditor and your counselor
come to an agreement on that new lower amount, your creditor gets paid from that savings
account you have been paying into.

Advantages of Debt Settlement

Debt settlement is the end of the road when it comes to paying off your debts. The only step
farther is declaring bankruptcy.

The major advantage debt settlement has over a regular debt management plan is that the total
amount you must pay will be significantly reduced. This includes reducing or eliminating the
finance charges.  It can also reduce the principal owed.  No other non-bankruptcy solution will
reduce your principal owed. At this point, your creditors are trying to take whatever they can get,
hoping to not be left with zero dollars in payments if you go bankrupt.
Disadvantages of Debt Settlement

Every other debt management solution works to preserve your credit rating, keep your creditors
happy, and keep your budget on track. Debt settlement does not. It comes with some unique
disadvantages, making debt settlement your last option.

 Immediate Damage to Your Credit. With debt settlement, you immediately stop paying all
creditors while the negotiations are in progress. This means your creditors will immediately start
reporting you as delinquent on all of your accounts. This will do a lot of damage to your credit.
 Long-Term Damage to Your Credit. Your credit report shows one of three statuses for each of
your credit accounts:  OK/Paid, Late/Delinquent, and “Settled.” A “settled” status means the
amount owed was discharged through a debt settlement negotiation. This is better than an
unpaid account, but it is nowhere near as good as “OK/Paid”. This will remain on your credit
report for at least 7 years.
 Increased Harassment. Your creditors will not be happy when you stop making monthly
payments, they and will try to bounce claims off you and your credit counselor at the same time,
trying to “catch” inconsistencies in the way you are managing your debt.  This will improve their
bargaining position. Your credit counselor will usually advise you NOT to answer your creditors
at all while debt settlement negotiations are in progress.
 Credit Restrictions of Debt Management. You will be required to close your credit cards and will
be prevented from opening new lines of credit while the negotiations are in progress.

Predatory Credit Counselling Services

If you enter debt settlement proceedings, your credit counselors will usually be paid a fee based
on a percentage of the total amount of debt that they are able to get “cancelled”. For example, if
they negotiate a $1000 debt down to $700, they may charge you $150 as a fee for the service.

For large debt loads, this can be a real money-maker. This opens the door to potential predatory
practices. A predatory credit counselor will usually advise debt settlement as a first step, or
suggest it before exploring other alternatives. There are plenty of cases where debt settlement is
the best option, but if it is the first suggestion, you should get a second opinion.

Pop Quiz

[qsm quiz=144]

Challenge Questions

1. What do you understand by the term credit counselling?

2. Using the internet, research the two credit counselling bodies mentioned in the text, providing
an overview of what they do and how they help people?
3. What restrictions do people take when addressing their debt?
4. What are the advantages and disadvantages of debt settlement?
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