Everything You Need to Know About Debt Counseling

Caught in the squeeze of the worst economic downturn since the Great Depression, many people have fallen victim to lay-offs as employers take drastic measures to stay afloat during these hard times. To add insult to the injury of job loss, even those who have used credit responsibly all their lives are finding themselves being dragged down by monthly debt payments threatening to spiral out of control that they are ill equipped to pay. Unemployment rates are the highest since 1983 and credit card delinquencies are at record highs. Many are desperate and are turning to debt counselors seeking help.

All debt counselors are not created equal. When choosing a debt counseling service, you are not just choosing someone just to help you manage your debt. You are choosing someone who will influence your life, your future and your credit rating. Along with the poor economy has come significant growth in the debt-settlement industry, a predicable result of increasing numbers of families in financially distressed circumstances. Unfortunately at times like these, unscrupulous opportunists emerge it seems in droves to further victimize those who can least afford it. So if you are considering seeking the help of a debt counseling service you first need to ask yourself some questions before you even start your search. First and foremost is, why do you think you need a debt counselor and what kind of services will be required to meet your needs? Also, think about your particular situation and whether debt counseling is the right solution.

Primarily debt counselors help consumers by assisting in the development of a sensible debt repayment plan for personal unsecured debt like credit card debt and by working directly with an individual's creditors to negotiate lower monthly payments, the reduction of interest rates and the elimination of fees. Typically the debt counseling service then sets up an account for the debtor who makes one consolidated payment to the account each month and the debt counseling service then disburses payments from the account to the individual creditors until the debts are re-paid. All debt counseling services, even the non-profits like Consumer Credit Counseling Services (CCCS) charge clients a fee, usually based on a percentage of the total debt owed. CCCS typically charges a fee equal to 10% but other services charge as high as 13 percent to 20 percent. The fee you will be charged is one of the first questions you should ask when contacting a debt counseling service. According to the National Foundation for Credit Counseling, start-up fees should not exceed $50 and monthly fees should be in the range of about $25.

If you decide to use the debt counseling option carefully check out the service you are considering before entering into an agreement with them to avoid the unscrupulous ones. Some debtors have enrolled in debt repayment plans and made the agreed payments only to learn later that all of their payments went towards the fees of the debt counseling service and nothing was paid to creditors putting them deeper into debt and further damaging their credit scores. Reputable services are generally members in good standing with the Better Business Bureau and the National Foundation for Credit Counseling. Beware of any service that makes unrealistic promises like they will reduce your debts by 50 percent or more through negotiations with lenders. Generally, debt counselors are able to obtain on your behalf reduced interest rates and the reduction of fees associated with your accounts but it is most unlikely that anyone could obtain a 50 percent reduction is debt balances.

Debt counselors can't produce miracles and for many, debt counseling may not be a reasonable option. Generally debt counseling companies only make sense for consumers who don't want to negotiate with creditors on their own behalf as most of the things a debt counselor can do for you, you can actually do for yourself. Admittedly dealing with creditors when you aren't in the position to make even the minimum monthly payments is not a pleasant prospect, but by doing this yourself, you can save the 10% or more that you would have to pay in fees to a service and have it applied to your debts or other living expenses instead. In fact, Citigroup Inc. encourages its customers to contact them directly for settlement and other debt repayment program assistance and a spokesman for Chase Card Services recently went on record to say that while Chase will work with debt counseling services, they do not offer more favorable terms than the customer would receive by working with them directly.

Some consumers have such severe credit problems, that bankruptcy may be the only realistic option. Because of their circumstances, some people simply should look to bankruptcy rather than bleed their remaining assets dry paying fees to third parties debt counseling services. In fact reputable debt counseling services will after a thorough review of your income, debts (secured, and unsecured), and living expenses tell you whether you would benefit from their services or would be better served to take bankruptcy. Changes to the bankruptcy law in 2005 made it much more difficult for debtors to qualify for Chapter 7 bankruptcy which discharges all debts and allows people to start over with a clean slate. Still Chapter 13 plans may offer a better solution than can be achieved through use of a debt counseling service. Bankruptcy law, even more complicated now than before the recent changes, is not a do-it-yourself proposition and will require a knowledgeable attorney. Since the law is written to allow for payment of attorney fees first, regardless of your circumstances you need not feel that bankruptcy is not an option because you think you can't afford to hire legal representation.

Having debt problems, especially for those who have never had them in the past can be both stressful and embarrassing. When faced with circumstances we feel ill equipped to handle, our first inclination is often to just ignore the problem. Regardless of what option you choose with regard to debt repayment problems, do not resort to trying to ignore them because they will not go away. Ignoring debt problems will lead to even more unpleasant things like frequent calls from bill collectors, legal action and ultimately even property liens, court judgments and garnishment of wages, making a bad situation even worse.