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Choosing a Choosing a $

Credit Counselor edit Counselor edit Counselor

L iving 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.

CHOOSING A C REDIT C OUNSELING O RGANIZATION

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 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.
Facts for Consumers

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. (If they don’t have complaints

about them, it’s not a guarantee that they’re

legitimate.) Then, it’s time for you to interview

the final “candidates.”

Questions to Ask 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.

Debt Management Plans ebt 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
Facts for Consumers

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.

What debts aren’t be 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.

● 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.

● 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.

● 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.

● Review monthly statements from your

creditors to make sure they have received

your payments.

● 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 NEGOTIATION P ROGRAMS

Debt negotiation is not the same thing as credit

counseling or a DMP. 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 many states have laws regulating

debt negotiation companies and the services

they offer.

The Claims The Claims

Debt negotiation firms may claim they’re

nonprofit. They also may claim that they can

arrange for your unsecured debt — typically,

credit card debt — to be paid off for anywhere

from 10 to 50 percent of the balance owed. For

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

a debt negotiation firm may claim it can arrange for you to pay off the debt with a lesser

amount, say $4,000.

The 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 negative information can be

removed from your credit report when you

complete the debt negotiation program. The

firms usually tell you to stop making payments

to your creditors, and instead, send your payments to the debt negotiation company. The

firms may promise to hold your funds in a

special account and pay the creditors on your

behalf.

The Truth

Just because a debt negotiation company describes itself as a “nonprofit” organization,

there’s no guarantee that the services they 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. All this can

quickly cause a consumer’s original debt to

double or triple. What’s more, most debt

negotiation companies charge consumers subFacts for Consumers
Federal Trade Commission

Bureau of Consumer Protection

Office of Consumer and Business Education

November 2003

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Facts for Consumers

stantial fees for their services, including a fee

to establish the account with the debt negotiator, a monthly service fee, and a final fee of a

percentage of the money you’ve supposedly

saved.

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.

Tip-offs to Rip-offs Tip-offs to Rip-offs

Steer clear of companies that:

● guarantee they can remove your unsecured debt

● promise that unsecured debts can be paid

off with pennies on the dollar

● claim that using their system will let you

avoid bankruptcy

● require substantial monthly service fees

● demand payment of a percentage of

savings

● tell you to stop making payments to or

communicating with your creditors

● require you to make monthly payments to

them, rather than with your creditor

● claim that creditors never sue consumers

for non-payment of unsecured debt

● promise that using their system will have

no negative impact on your credit report

● claim that they can remove accurate

negative information from your credit

report.

If you decide to work with a debt negotiation

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

The FTC works for the consumer 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 to get free

information on consumer issues, visit

www.ftc.gov or call toll-free, 1-877-FTCHELP (1-877-382-4357); TTY: 1-866-653-

4261. The FTC enters Internet, telemarketing,

identity theft, and other fraud-related complaints into Consumer Sentinel, a secure online

database available to hundreds of civil and

criminal law enforcement agencies in the U.S.

and abroad.