One of the options many of our clients consider before showing up for their free consultation is a credit counseling service. These services are not to be confused with the mandatory credit counseling all bankruptcy filers have to go through. One gets involved in managing parts of your financial life, while the other is an hour-long class on budgeting and personal finance that can help you avoid bankruptcy in the future.
Credit counselors will typically negotiate with your creditors, or claim to. They will then come up with one monthly lump sum for you to send to them. The idea is they will divide up the payment and distribute it among the different creditors, much like a Chapter 13 bankruptcy plan, though with key differences that can make counseling a horrible idea.
It’s very easy to fall in with the wrong credit counselors.
There are some reputable non-profit credit counseling organizations out there. They do not take any extra money for helping you. Some even provide approved credit counseling courses that can fulfill your bankruptcy requirements. If you’re going to engage in credit counseling, these are the ones you need to focus on working with.
However, there are many for-profit counselors out there, and they often take names very similar to the non-profit ones. Some of them won’t tell you there’s any difference. They’ll bury a monthly fee for their “services” into the fine print.
So, perhaps you end up giving them $250 every month. They might take $49 into their own pockets and then distribute what’s left to creditors.
Sure, they’re still paying your creditors, but that’s $49 you could have either used towards getting out of debt or used on the basic expenses you’re probably still struggling with.
Your situation may already be too far gone for credit counselors to be effective.
Credit counseling services can be somewhat helpful if all your debts are still with first-party creditors.
A first-party creditor is whomever issued the debt in the first place. If you have a car loan, it’s that financing company. If you have a credit card, it’s Premier Bank or Merrick Bank or whomever issued the card.
The right service can work with a first-party creditor to negotiate lower interest rates and lower minimum monthly payments to help you catch up. If the gap between what you can pay and what you need to pay is small this can be a godsend. It can also mean owing less money in the long run.
However, a third-party collector is any collection agency.
There are two types. One type actively seeks various organizations as an account. The credit card company, department store, hospital, financial company or whatever is a client of the agency. When they get money from you, they pay their client, minus a small percentage fee. Since debt that goes to collections is now bad debt the percentage fee is something of a wash: at this point the first-party creditor is just taking a shot across the bow and is aware they might get nothing.
The second type is a debt buyer. They typically buy debts from other collection agencies for pennies on the dollar. So if you owe $1000, they might buy your debt for $200. They may then pursue you for the full $1000, making a profit when you repay. This type tends to be the most ruthless as they want to recoup their investment. This type of debt is usually old and may even be past the 4-year statute of limitations for lawsuits. While you may want to pay these people out of some moral obligation there’s almost no tactical benefit in doing so, especially since they don’t always do a very good job of closing out accounts that have been paid. Sometimes they sell them to other debt buyers, who come after you for the same debt.
Either way, credit counselors can’t do much to improve your situation with third-party creditors. They’re not allowed to charge interest or additional fees anyway, so there’s not much to negotiate.
It might not protect you from lawsuits.
Some credit counselors just start sending small payments to creditors without negotiating with them at all. These payments may be well short of what they are prepared to accept. In fact, these payments might be well short of anything anyone would accept. Unscrupulous “counselors” have been known to send out payments of less than a dollar.
An aggressive creditor might just start the lawsuit process anyway, and you’d be blindsided. Caught off guard, because you’d believed all along that you were being taken care of by the company who was receiving your check every month.
It won’t help your credit.
Bankruptcy could help your credit far more than these services ever could. It will remove all the nicks, bruises, and breaks that are all over your report. It truly does give you a fresh start.
Meanwhile, the fact that you are in credit counseling does get reported to the bureaus. They list it on the report and it brings down your score. Worse, some companies will continue reporting your payments as late instead of current, because the counseling company couldn’t talk them down on their minimum or interest rates. You’re sending these people money every month, but you’re still being reported on as if you hadn’t sent a dime.
You won’t get a discharge.
As mentioned, these services are essentially setting up something very similar to a Chapter 13 bankruptcy without providing all the benefits of a Chapter 13 bankruptcy. You don’t get an automatic stay, there’s no provisions for protecting your house or your car, and, most of all, the debt won’t be discharged when you’re done.
This means very few people will find it advantageous to trust these services instead of simply pursuing a bankruptcy case.
Before trusting your money to a credit counseling organization, why not use our free consultation to find out whether bankruptcy is right for you? Bankruptcy could help you fix your financial life faster. Contact us today.