All You Need To Know About Debt Counseling
Many people have a hard time responsibly managing their debt.
They may accumulate debt bit by bit until they reach a point where they are unsure how they will ever pay it back.
While bankruptcy may be the most well-known solution for this situation, debt counseling is another viable option.
Unlike bankruptcy, debt counseling will not stay on an individual's credit report for nearly a decade.
Debt counseling involves meeting with a qualified debt counselor who will analyze one’s finances and debt to develop a comprehensive debt management plan.
They will also negotiate with the individual creditors in an attempt to lower interest rates and reduce late fees.
Those borrowers who undergo debt counseling can greatly reduce the overall cost of their debt and regain control over their financial situation.
When To Use It
- A large Amount Of Unsecured Debt: Because unsecured debts do not require collateral to guarantee the loan, they come with the highest interest rates. This makes unsecured debt the best candidate for counseling. It is important to note that counselors can only reduce interest rates on unsecured debts, mostly credit cards.
- No Longer Able To Make Minimum Payments: When one can no longer make minimum payments on their debts it is a clear indication that it is time to get some help. Credit counseling plans can reduce, and in some cases eliminate, fees associated with missed or late payments.
- Creditors Have Undergone Collection Actions: Anyone who has had collection action taken against them knows how stressful the constant harassment from collection agencies can be. When one commits to a debt counseling plan, all collection efforts are stopped.
- Monthly Payments Are Too Large: A debt management plan consolidates all debts into a single monthly payment. Because of the lower interest rate on some unsecured debts, this single monthly payment is typically lower than what the individual was paying before engaging in debt counseling. This lower monthly obligation makes it easier for people to regain control over their finances.
Key Questions To Ask A Debt Counselor
Due to the explosion of credit card debt in the mid-1980s, government agencies began to finance non-profit credit counseling services. Unlike private debt counselors, they do not profit from the debt management plans they create, and thus no conflict of interest is present.
When meeting with a debt counselor it is important to ensure that they are qualified and able to answer the following important questions:
- Are the counselors accredited?
- What fees are associated with a debt management plan?
- What will the prospective payment schedule look like?
- How confident are the counselors that they will be able to reduce interest rates and late payment fees?
- Is the agency a member of the United States Trustee Programs list of counseling services offering pre-bankruptcy debt counseling services?
Debt Counseling Alternatives
Debt counseling and debt management plans may not be for everyone. Those who have large amounts of secured debt may find they receive little relief from debt management plans. Should one find themselves in this situation, there are some alternatives to be considered.
- Bankruptcy: Although best avoided, bankruptcy may be the only option for some individuals whose debt is too large for debt counseling to make a difference.
- Debt Consolidation: Anyone who has a high amount of credit card debt may consider a consolidation loan before undergoing debt counseling. This option is only viable for those who have a high enough credit score to qualify for the loan.
- DIY Debt Management Solutions: Debt reduction strategies such as the debt snowball or the debt avalanche method can be effective solutions for lowering one’s debt load. These are aggressive strategies but require discipline and dedication.
Is It Right For You?
Debt counseling is not the best option for everyone. This is evident by the fact that only 10% - 20% of those who seek out these services end up using them. Of those who do decide to go through with a debt management plan, only about 50% of people end up completing them. Before seeking out credit counseling services, the following items should be taken into consideration:
- Unsecured debt totals somewhere between 15% and 40% of one’s annual income.
- There are several credit card accounts open that all carry balances.
- Debts carry high interest rates, high fees, or hard-to-make minimum payments.
- The financial situation is stable enough to meet a minimum monthly payment.
Credit counseling agencies can arrange debt management plans to aid individuals struggling with unsecured consumer debt.
These agencies have relationships with credit card companies that enable them to negotiate lower interest rates for their clients.
These plans are not easy and require a great deal of dedication on behalf of the debtor but can ultimately lead to freedom from debt when used wisely.