February 2011

Living paycheck to paycheck? Worried about debt collectors? Can’t seem to develop a workable 

budget, let alone save money for retirement? If this 

sounds familiar, you may want to consider the 

services of a credit counselor. 

Many credit counseling 

organizations are nonprofit and 

work with you to solve your 

financial problems. But beware 

– just because an organization 

says it is “nonprofit” doesn’t 

guarantee that its services are free or affordable, or 

that its services are legitimate. In fact, some credit 

counseling organizations charge high fees, some of 

which may be hidden, or urge consumers to make 

“voluntary” contributions that cause them to fall 

deeper into debt.

Most credit counselors offer services through local 

offices, the Internet, or on the telephone. If possible, 

find an organization that offers in-person counseling. 

Many universities, military bases, credit unions, housing authorities, and branches of the U.S. Cooperative 

Extension Service operate nonprofit credit counseling 

programs. Your financial institution, local consumer 

protection agency, and friends and family also may be 

good sources of information and referrals.

Amendments to the FTC’s 

Telemarketing Sales Rule prohibit 

for-profit credit counselors who sell 

debt settlement and other debt relief 

services on the phone from charging 

or collecting a fee before they settle, 

reduce or alter your debt. If you do business with a 

for-profit debt relief company, you may be required 

to put money in a dedicated bank account, which will 

be administered by an independent third party. See 

Settling Your Credit Card Debts at ftc.gov/credit for 

more information.

Choosing a Credit 

Counseling Organization 

Reputable credit counseling organizations advise you 

on managing your money and debts, help you develop 

a budget, and usually offer free educational materials 

and workshops. Their counselors are certified and 

trained in the areas of consumer credit, money and 

Fiscal Fitness: 

Choosing a Credit Counselor

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debt management, and budgeting. Counselors discuss 

your entire financial situation with you, and help 

you develop a personalized plan to solve your money 

problems. An initial counseling session typically lasts 

an hour, with an offer of follow-up sessions.

A reputable credit counseling agency should send 

you free information about itself and the services it 

provides without requiring you to provide any details 

about your situation. If a firm doesn’t do that, consider 

it a red flag and go elsewhere for help.

Once you’ve developed a list of potential counseling 

agencies, check them out with your state Attorney 

General, local consumer protection agency, and Better 

Business Bureau. They can tell you if consumers have 

filed complaints about them. (But even if there are 

no complaints about them, it’s not a guarantee that 

they’re legitimate.) The United States Trustee Program 

also keeps a list of credit counseling agencies that have 

been approved to provide pre-bankruptcy counseling. 

You can find a state-by-state list of governmentapproved organizations at www.usdoj.gov/ust.

After you’ve done your background investigation, it’s 

time for the most important research – you should 

interview the final “candidates.”

Questions to Ask

Here are some questions to ask to help you find the 

best counselor for you.

What services do you offer? Look for an 

organization that offers a range of services, including 

budget counseling, and savings and debt management 

classes. Avoid organizations that push a debt 

management plan (DMP) as your only option before 

they spend a significant amount of time analyzing your 

financial situation.

Do you offer information? Are educational materials available for free? Avoid organizations that charge 

for information.

In addition to helping me solve my immediate 

problem, will you help me develop a plan for 

avoiding problems in the future? 

What are your fees? Are there set-up and/or 

monthly fees? Get a specific price quote in writing.

What if I can’t afford to pay your fees or make 

contributions? If an organization won’t help you 

because you can’t afford to pay, look elsewhere for help.

Will I have a formal written agreement or contract 

with you? Don’t sign anything without reading it first. 

Make sure all verbal promises are in writing.

Are you licensed to offer your services in my state?

What are the qualifications of your counselors? 

Are they accredited or certified by an outside organization? If so, by whom? If not, how are they trained? Try 

to use an organization whose counselors are trained by 

a non-affiliated party.

What assurance do I have that information 

about me (including my address, phone number, 

and financial information) will be kept confidential and secure?

How are your employees compensated? Are they 

paid more if I sign up for certain services, if I pay a fee, 

or if I make a contribution to your organization? If the 

answer is yes, consider it a red flag and go elsewhere 

for help.

FTC Facts For Consumers 2
A successful DMP 

requires you to make 

regular, timely 

payments, and could 

take 48 months or 

longer to complete. 

Debt Management Plans

If your financial problems stem from too much 

debt or your inability to repay your debts, a credit 

counseling agency may recommend that you enroll in 

a debt management plan. A DMP alone is not credit 

counseling, and DMPs are not for everyone. Consider 

signing on for one of these plans only after a certified 

credit counselor has spent time thoroughly reviewing 

your financial situation, and has offered you customized advice on managing your money. Even if a DMP 

is appropriate for you, a reputable credit counseling 

organization still will help you create a budget and 

teach you money management skills.

How a DMP Works

You deposit money each month with the credit 

counseling organization. The organization uses your 

deposits to pay your unsecured debts, like credit card 

bills, student loans, and medical 

bills, according to a payment schedule the counselor develops with you 

and your creditors. Your creditors 

may agree to lower your interest 

rates and waive certain fees, but 

check with all your creditors to be 

sure that they offer the concessions 

that a credit counseling organization describes to you. A successful 

DMP requires you to make regular, 

timely payments, and could take 48 months or longer 

to complete. Ask the credit counselor to estimate how 

long it will take for you to complete the plan. You 

also may have to agree not to apply for – or use – any 

additional credit while you’re participating in the plan.

Is a DMP Right For You?

In addition to the questions already listed, here are 

some other important ones to ask if you’re considering 

enrolling in a DMP.

Is a DMP the only option you can give me? Will 

you provide me with on-going budgeting advice, 

regardless of whether I enroll in a DMP? If an 

organization offers only DMPs, find another credit 

counseling organization that also will help you create a 

budget and teach you money management skills.

How does your DMP work? How will you make 

sure that all my creditors will be paid by the applicable 

due dates and in the correct billing cycle? If a DMP 

is appropriate, sign up for one that allows all your 

creditors to be paid before your payment due dates 

and within the correct billing cycle.

How is the amount of my payment determined? What if the 

amount is more than I can afford? 

Don’t sign up for a DMP if you 

can’t afford the monthly payment.

How often can I get status 

reports on my accounts? Can I 

get access to my accounts online 

or by phone? Make sure that the 

organization you sign up with is 

willing to provide regular, detailed statements about 

your account.

Can you get my creditors to lower or eliminate 

interest and finance charges, or waive late fees?

If yes, contact your creditors to verify this, and ask 

them how long you have to be on the plan before the 

benefits kick in. 

FTC Facts For Consumers 3
What debts aren’t included in the DMP? This 

is important because you’ll have to pay those bills on 

your own.

Do I have to make any payments to my creditors 

before they will accept the proposed payment 

plan? Some creditors require a payment to the credit 

counselor before accepting you into a DMP. If a credit 

counselor tells you this is so, call your creditors to 

verify this information before you send money to the 

credit counseling agency.

How will enrolling in a DMP affect my credit? 

Beware of any organization that tells you it can remove 

accurate negative information from your credit 

report. Legally, it can’t be done. Accurate negative 

information may stay on your credit report for up to 

seven years.

Can you get my creditors to “re-age” my accounts 

– that is, to make my accounts current? If so, how 

many payments will I have to make before my creditors will do so? Even if your accounts are “re-aged,” 

negative information from past delinquencies or late 

payments will remain on your credit report.

How to Make a DMP Work for You

The following steps will help you benefit from a DMP, 

and avoid falling further into debt.

Q Continue to pay your bills until the plan has been 

approved by your creditors. If you stop making 

payments before your creditors have accepted 

you into a plan, you’ll face late fees, penalties, and 

negative entries on your credit report. 

Q Contact your creditors and confirm that they 

have accepted the proposed plan before you 

send any payments to the credit counseling 

organization for your DMP. 

Q Make sure the organization’s payment schedule 

allows your debts to be paid before they are due 

each month. Paying on time will help you avoid 

late fees and penalties. Call each of your creditors 

on the first of every month to make sure the 

agency has paid them on time. 

Q Review monthly statements from your creditors 

to make sure they have received your payments. 

Q If your debt management plan depends on your 

creditors agreeing to lower or eliminate interest 

and finance charges, or waive late fees, make sure 

these concessions are reflected on your statements.

Debt Settlement 

Programs

Debt settlement differs greatly from credit counseling 

and DMPs. It can be very risky, and have a long term 

negative impact on your credit report and, in turn, 

your ability to get credit. That’s why the FTC and 

many states have laws or rules regulating debt settlement companies and the services they offer. Contact 

your state Attorney General for more information.

The Claims

Debt settlement firms may claim they’ll negotiate with 

your creditors to reduce the amount you owe. Some debt 

settlement companies may claim that they can arrange 

for your debt to be paid off for a much lower amount – 

anywhere from 30 to 70 percent of the balance you owe. 

For example, if you owe $10,000 on a credit card, a debt 

settlement company may claim it can arrange for you to 

pay off the debt for less, say $4,000. Some debt settlement 

firms may also claim to be nonprofit. 

Debt settlement firms often pitch their services as an 

alternative to bankruptcy. They may claim that using 

their services will have little or no negative impact 

on your ability to get credit in the future, or that any 

FTC Facts For Consumers 4
Accurate negative 

information may stay 

on your credit report 

for up to seven years.

negative information can be removed from your credit 

report when you complete their debt negotiation program. The firms usually tell you to stop making payments to your creditors and, instead, send payments 

to the debt negotiation company. 

The firm may promise to hold your 

funds in a special account and pay 

your creditors on your behalf.

The Truth

There is no guarantee that the 

services debt settlement companies 

offer are legitimate. There also is no guarantee that a 

creditor will accept partial payment of a legitimate 

debt. In fact, if you stop making payments on a credit 

card, late fees and interest usually are added to the debt 

each month. If you exceed your credit limit, additional 

fees and charges also can be added. This can cause your 

original debt to double or triple. All these fees will put 

you further in the hole. 

While creditors have no obligation to agree to negotiate the amount a consumer owes, they have a legal 

obligation to provide accurate information to the 

credit reporting agencies, including your failure to 

make monthly payments. That can result in a negative 

entry on your credit report. And in certain situations, 

creditors may have the right to sue you to recover the 

money you owe. In some instances, when creditors win 

a lawsuit, they have the right to garnish your wages or 

put a lien on your home. Finally, the Internal Revenue 

Service may consider any amount of forgiven debt to 

be taxable income.

Fees

Amendments to the FTC’s Telemarketing Sales Rule 

prohibit companies that sell debt settlement and other 

debt relief services on the phone from charging a fee 

before they settle or reduce your debt.

If you do business with a debt settlement company, 

you may be required to put money 

in a dedicated bank account, 

which will be administered by 

an independent third party. 

The account administrator may 

charge you a reasonable fee, and is 

responsible for transferring funds 

from your account to pay your 

creditors and the debt settlement company when 

settlements occur. See Settling Your Credit Card Debts

at ftc.gov/credit for more information. 

Disclosure Requirements

Before you sign up for the service, the debt settlement company must give you information about the 

program’s: 

Q Price and terms. The company must explain its 

fees and must tell you about any conditions on its 

services.

Q Results. The company must tell you how long it 

will take to get results. That is, how many months 

or years before the company will make an offer to 

each creditor. 

Q Offers. The company must tell you how much 

money or what percentage of each outstanding 

debt you must save before it will make an offer to 

each creditor. 

Q Non-payment. If the company asks you to stop 

making payments to your creditors – or if the 

program relies on your not making payments 

– the company must tell you about the possible 

negative consequences of doing so.

FTC Facts For Consumers 5
Tax Consequences

Depending on your financial condition, the amount of 

any savings you obtain from debt relief services can be 

considered income and taxable. Credit card companies 

and others may report settled debt to the IRS, and the 

IRS considers it income, unless you are “insolvent.” 

You are insolvent when your total debts are more than 

the fair market value of your total assets. Insolvency 

can be fairly complex to determine – please talk to a 

tax professional if are not sure whether you qualify for 

this exception. 

Tip-offs to Rip-offs

Steer clear of debt relief companies that:

Q charge any fees before it settles your debts

Q guarantee they can remove your unsecured debt 

Q tout a “new government program” to bail out 

personal credit card debt 

Q promise that unsecured debts can be paid off with 

pennies on the dollar

Q tell you to stop making payments to or communicating with your creditors

Q tell you it can stop all debt collection calls and 

lawsuits

Q claim that creditors never sue consumers for 

non-payment of unsecured debt 

Q promise that using their system will have no 

negative impact on your credit report

Q claim that they can remove accurate negative 

information from your credit report. 

If you decide to work with a debt settlement company, 

be sure to check it out with your state Attorney General, local consumer protection agency, and the Better 

Business Bureau. They can tell you if any consumer 

complaints are on file about the firm you’re considering doing business with. Also, ask your state Attorney 

General if the company is required to be licensed to 

work in your state and, if so, whether it is.

For More Information

To learn more about dealing with debt, visit 

www.ftc.gov/MoneyMatters. 

The FTC works to prevent fraudulent, deceptive 

and unfair business practices in the marketplace 

and to provide information to help consumers spot, 

stop and avoid them. To file a complaint or get free 

information on consumer issues, visit ftc.gov or call 

toll-free, 1-877-FTC-HELP (1-877-382-4357); 

TTY: 1-866-653-4261. Watch a video, How to File 

a Complaint, at ftc.gov/video to learn more. The 

FTC enters consumer complaints into the Consumer 

Sentinel Network, a secure online database and investigative tool used by hundreds of civil and criminal law 

enforcement agencies in the U.S. and abroad.

FTC Facts For Consumer 6

For The Consumer Federal Trade Commission

ftc.gov 1-877-ftc-help