Credit Counseling For Debts In Collections
Anyone who has had a consumer debt go into collections knows just how frustrating the situation can be. Debt collector actions can be predatory, harassing, and at times even illegal. Getting out of this type of situation may require the help of a credit counselor.
First Things First - What Is Credit Counseling?
Credit counselling is a service offered by financial education organizations that help individuals regain control over their economic situation.
During credit counseling, the borrower will sit down with a debt expert to review the specifics of their debts, their monthly income, and expenses, as well as their spending habits. All this is done with an aim at creating a debt management plan which, if followed correctly, can lean the individual to a debt-free life.
Credit counseling can be especially beneficial to individuals who have either defaulted or are close to defaulting on their debts as well as those who have collection actions being taken against them.
Debt Management Plans
A debt management plan (DMP) is a debt payoff tool offered by credit counseling services. The credit counselling company negotiates with its client's creditors in order to consolidate all their consumer debts into a single monthly payment that carries a significantly lower interest rate. These plans usually run between three and five years and are subject to a monthly fee.
For example, consider an individual whose $10,000 of credit card debt has been sent to collections. The constant phone calls and attempted collection efforts drive them to seek out the help of a credit counseling professional. This credit counselor will contact the credit card companies and work out a repayment plan at a reduced interest rate. This is of particular importance because the average interest rate for credit cards can be between 19% and 39%. Debt management plans come with a start-up fee usually between $30 and $40 as well as a monthly fee between $20 and $40.
How It Works With Collectors
When borrowers miss too many payments, the creditor will typically close the account and send it to collections. There is an important distinction between in-house and third-party collections. In-house collections means the original creditor is still trying to collect on the debt. When the original creditor feels the debt is not worth the effort to collect they will write off the debt and sell it to a third-party collection service.
In most cases, creditors are open to working with any BBB-accredited credit counselor in developing a debt management plan if it means they will be paid. The creditor is under no obligation to accept any plan presented by the credit counselor and should they decide not too, there is no further recourse.
What About Third Party Collectors?
In most circumstances, credit card companies will work with any BBB-accredited credit counseling agencies to develop an affordable debt management plan. This being said, things change slightly when the original creditor has written off a debt and passed it along to a third-party collector.
By law, debts that have been written off as a loss by the original creditor can no longer incur interest or late penalties. Due to this, third-party collectors may be less willing to work with a credit counselor on a debt management plan. Still, many choose to enroll in the plan if it means they receive more than they originally paid for the debt.
The Main Benefits Of A Debt Management Plan And Why It Matters
A debt management plan is just one of several solutions individuals have to deal with spiraling debts. Each particular solution is accompanied by its own advantages and in terms of a DMP, the three main benefits listed below:
- Lower Interest Rates: Depending on the individual's credit score, interest rates can usually be reduced to roughly half of the original rate. This can provide immense savings over the long run.
- Single Monthly Payment: Because all debts are consolidated into a single monthly payment managing one’s debt becomes significantly easier.
- Pays Off Debt Faster: Due to high-interest rates, credit cards and other unsecured debt can be hard to pay off promptly. DMPs allow individuals to pay off their debt faster than they otherwise would have.
Debt management plans can be a viable debt solution for those who have collection efforts ongoing against them. It is important to evaluate the monthly fees and start-up costs along with comparing the overall cost against other debt reduction methods such as consolidation loans.