FAQ: What About Credit Counseling?

Susanne Robicsek Bankruptcy Attorney
(704) 377-0776

What About Credit Counseling?

NC Bankruptcy Lawyer in Charlotte North Carolina for Chapter 7 / Chapter 13

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What About Credit Counseling?

The problem that I have with many credit counselors, debt management programs and debt settlement companies is that their focus is often on the debt more than the client.

The debt management plans ("DMP") offered by most credit counselors are repayment plans, which are voluntarily agreed to (or not) by your creditors. They can not be forced upon your creditors.

It is true that:
    They may lower your payments. 
    They may lower your interest rates.
    They may lower your balances.
But, they may not do any of those things.

Many people are also surprised to learn that a DMP credit counseling program can negatively affect your credit rating.  They thought credit counseling would help save their credit scores.

It may not address all your debt problems.

Many people are suprised to know that participation in credit counseling or settlement programs by creditors is discretionary.  Not all creditors will work with credit counselors.  You may spend a lot of money trying to work with some of your creditors only to have it all fall apart because one or more won't work with you.  

I see many people who still have to file for bankruptcy after paying some of their debt for months/years because one or more creditors who were not in the program filed a lawsuit or otherwise caused problems.  Sometimes this is after paying many thousands of dollars to creditors through a DMP. 

Maybe the problem came up because they aren't able to finish paying the entire plan, or because it was from a creditor who wouldn't agree to the credit counseling plan and they continued with collection activities and lawsuits.

In my bankruptcy consultations, I may recommend that someone speak to a reputable credit counselor that offers a DMP if I think it might be appropriate.

I like clients being able to compare the different approaches. If I don't feel bankruptcy is a good option, I always say so, and I hope all good bankruptcy attorneys would do the same.

However if people are struggling and can repay some of their debts, Chapter 13 bankruptcy may still be a better alternative to credit counseling because as long as the bankruptcy laws are followed, creditors don't have to agree to anything and you are protected by the bankruptcy court, bankruptcy laws and your lawyer. 

The law says what the creditors must accept and gives guidelines.  If the bankruptcy law is followed, you don't have to get their acceptance. 

On the other hand, credit counseling is purely voluntary on the part of creditors.  They don't have to participate, and if they do they can make up the terms. 

   Bankruptcy doesn't always mean you don't pay.  

Even though a person files bankruptcy, that doesn't even mean that they aren't repaying their debts. 

Some Chapter 13 bankruptcy plans may pay 100% of the debts, but depending on the circumstances it also has the ability to lower what is paid to creditors if the client can't afford to pay in full. 

Sometimes it isn't how much is owed, but the interest rates being charged by the creditors.  Interest rates in bankruptcy are set by the Court so they aren't tied to what the creditor has been charging, and the rates can be lowered or even eliminated in some circumstances. 

So if something goes wrong a few years into the plan, Chapter 13 allows changes and forgives mishaps better than a DMP. Many DMP agreements end if you fall behind.

If someone starts out paying 100% of their debt but then has a change of circumstances like a job loss, medical issue or other financial problem then the repayment plan may be able to be modified to pay a lower amount. 

In a credit counseling plan, if you can't pay what you originally agreed to you might be left to the mercy of the creditors, kicked out and back to square one, plus interest. 

          Someone has to look at a realistic budget.

It doesn't work to look at the debt first without looking at the budget needs of people. 

Credit counselors, settlements and debt management programs often start with the amount owed, then they come up with a a number to pay towards the debts.  If they don't carefully consider the person's true ability to pay, this won't work.

Even if they look at a person's budget, they often take a client's word on spending habits without any further investigation of the true needs or spending habits of the client or just adjust the budget so the "numbers work".

It isn't that the clients lie, but most people are not really aware of how much the truly spend. That is often part of the problem. You have to factor in expenses that don't come up every month, such as car or house repairs, medical and dental needs, once a year tax payments, clothing, or other seasonal expenses. Many clients never think about these expenses, or it might have been so long since they have been able to repair something or buy new clothes that they don't factor it in.

Additionally, not all representatives who work for the credit counseling companies are qualified to really give financial advice. They may have only received basic training by the company that they work for to apply the credit counseling products that the company manages.

My focus is always on the client first, and the debt second.

After twenty + years of work in the field of bankruptcy, I know that the heart of every client's case is their budget. I always start with the client's income and expenses to see if they can live on what they make.

Then I see if there is anything left to pay towards the debt. If there is, then I look to see whether there is enough to cover the debt payments to pay off the debt in a reasonable amount of time. I review the client's budget, and see if there are any suggestions I can make to rework the budget to free up income to pay the debts.

If you choose to speak to someone offering "credit counseling," make sure that it is someone who has your best interests in mind. If you wish to explore an alternative to bankruptcy try your local Consumer Credit Counseling Service (CCCS); in my area it is a service supported by United Way.

The only credit counseling agency that offers a DMP that I am currently recommending is my local local Consumer Credit Counseling Service; in Charlotte, Monroe, Gastonia, and Concord offices. I know the individuals and the director and know that they are not an agency that tries to sign up people into a DMP just to get a commission. They also meet with clients in person to review debts, budgets and they create a spending plan to see if the DMP will be feasible.

You should beware of "counseling" companies, especially if you find them on the Internet. There are many companies advertising bankruptcy alternatives, settlements or credit counseling services that they may do you more harm than good.

Many have been, or are, being sued or investigated for problems with their programs, fees, or non-profit status. If you choose to speak to a credit counselor, be careful you are with a reputable company that provides good results.

You should make sure that you understand all of the fees charged for their program, and be aware that enrolling in a credit counseling program can negatively affect your credit rating

Some charge fees that aren't fully explained.
Some charge fees that are paid up front before they even attempt to work out a plan.
Some set up a monthly payment plan for you but do not work with you to make sure that your budget will allow you to make the required payments without falling behind on other expenses, especially your house or car payments.

Make not mistake:  The goal of credit counseling is to pay off debts.

It isn't to protect the individual from their creditors, to protect people's retirement accounts or homes, or even have them live on a balanced budget with emergency savings.

Creditors who agree to work with a debt management program may lower interest rates or payments, but the payment balance may not change, or it may even increase if they are just stretching out the payments but not reducing interest or balances.

Credit counseling works best for people with the ability to pay their debts in full, or at least a great portion of the debt amount. You must be able to pay the credit counseling payment without falling behind on your regular living expenses such as your house and car payments for this to be a really good option.

Credit counseling is an option to help you pay your debts if you are able. The true ability to repay is often overlooked by many companies offering debt management plans.

If you speak to a credit counseling agency, make sure that they look at your overall situation, and that they consider whether or not your budget will take care of your family's needs - in addition to the payment to the agency for your debts. Some agencies only look at the debt payment and pay little or no attention to your actual ability to pay your other living expenses after making the payment to them.

People who aren't lawyers can not give legal advice at all. This limits what credit counselors can say. Lawyers can give legal advice so speaking to an attorney allows you to look at different alternatives, including bankruptcy, non-bankruptcy legal solutions, and options like credit counseling.

Non-attorneys are not allowed to give you legal advise, so there are things you won't learn if you don't speak to a lawyer.

Lawyers can discuss all options and explain legal issues including credit counseling, debt managment, payment plans and settlement.

Also when a credit counselor that offers you a DMP, they may have a vested interest (a commission) based upon getting you to sign up for their program and make a few payments, even if they know you won't be able to complete the program.

Finally, consulting with a good bankruptcy attorney does not mean that you are going to file for bankruptcy and it doesn't rule out credit counseling as an option.

It does mean that you are going to learn about all of your options, explained by someone qualified and able to talk about all your options and give you legal advice. Bankruptcy, credit counseling or some other option -- you need to make an informed decision.

For more information read my article "You Can’t Borrow Your Way Out Of Debt: Debt Management Programs" on the Bankruptcy Law Network: on credit counseling debt management programs

Also see Brett Weiss's article "Debt Management Programs”―Better Than Bankruptcy?" on the Bankruptcy Law Network: on credit counseling debt management programs

Shortcut to my page: What is the difference between traditional credit counseling and bankruptcy credit counseling?

Bankruptcy Law Network: What Is A Debt Management Plan?

Bankruptcy Law Network: What Credit Counseling or Debt Management Plan Helps Consumers?

The Law Office of Susanne M. Robicsek
1701 Scott Avenue Charlotte North Carolina 28203
phone:704 / 377-0776
fax: 704 / 377-0775

DISCLAIMER: This message is intended as a general discussion of legal issues and not as a statement of fact, legal advice or a legal opinion; Personal opinions may also be expressed. No attorney-client relationship is created by this message; Do not act or rely upon law-related information in this communication without seeking the advice of an attorney licensed to practice in the relevant area.
The Law Office of Susanne M. Robicsek is
a Federally Designated Debt Relief Agency
under the Bankruptcy Code.
I file bankruptcy cases for people in financial need,
and have been doing so since 1989.

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