Credit counseling is not a debt relief solution in itself. Instead, it’s a starting point for people who are looking for the right solution.
Written by the Upsolve Team.
Updated July 22, 2020
Credit counseling is not a debt relief solution in itself. Instead, it’s a starting point for people who are looking for the right solution. A nonprofit credit counseling agency will offer a 45-60 minute free session to help you explore your options. Your credit counselor can explain solutions like debt management plans, debt consolidation, and bankruptcy. Credit counseling agencies also offer more general money management assistance, such as financial education materials and budgeting help.
Working with a Nonprofit Credit Counseling Agency
When you’re looking for help managing money, it’s important to do your homework about the organization you choose to work with. There are many great programs created to help people hoping to regain control of their finances. But, the debt solutions industry also has more than its share of bad actors. Some for-profit companies, such as debt settlement providers, may make promises they can’t keep. When you’re under pressure it’s easy to be misled by promises of quick relief or drastically reduced debt. Unfortunately, that can be an expensive mistake.
Starting with a nonprofit credit counseling agency certified by the National Foundation for Credit Counseling (NFCC) can put you on the right path. The Better Business Bureau is another good source of information about debt counseling organizations and other providers you may be considering. You can also find information about which providers are reputable by checking with a consumer protection agency like the Consumer Financial Protection Bureau (CFPB), the Federal Trade Commission (FTC) or your state Attorney General. These agencies’ websites often provide information about what to watch out for when you’re seeking debt relief. They may also include lists of organizations that have been sued or press releases about legal action taken against specific companies.
Your options for completing credit counseling will depend on the agency you choose to work with. You may be able to complete your credit counseling session over the phone, online, or in person. During your free session, your credit counselor will gather some basic information from you. For example, they’ll ask about your income, debts, and living expenses. When the credit counselor has the big picture about your income and expenses, they’ll ask about your goals and challenges.
This piece is very personalized. Some people who visit a credit counselor are focused on solving a specific problem, such as paying off a student loan or large credit card debt. Others are working toward something like buying a home, and know they need to make changes to achieve their financial goals. In the same way, people’s challenges differ.
Some people are struggling with debt because they have more monthly expenses than income. Others may have fallen behind because of a setback, like job loss, a long illness, or a divorce. Understanding the root of the problem will help your credit counselor find solutions for you. It can be hard to talk about your financial problems and how you got into trouble, but you must be honest. Your credit counselor can’t help you unless they have complete and accurate information.
Information Your Credit Counselor Will Need
Everyone's financial issues are slightly different. That means every credit counseling session is also a little different. However, there is some basic information that most credit counselors will ask for during your free session. These items usually include:
Paycheck stubs and information about any other source of income you may have, such as child support you receive or retirement income
Complete information about all regular household expenses, such as rent, utility bills, and transportation expenses
Copies of credit card bills, loan schedules, collection notices and any other documents showing balances and due dates
Information about the status of your debts and any past-due balances, lawsuits, or wage garnishments
To make the most of your credit counseling session, you should organize this information in advance. Make a list of household expenses, and double-check to make sure you aren’t forgetting anything. Make a note if you have any debts you don’t have statements for, to make sure you don’t leave anything out when you talk to your credit counselor.
Two Types of Credit Counseling Services
You may have heard of credit counseling as a requirement before filing bankruptcy. Sometimes, the use of the same term to describe bankruptcy counseling confuses people. But, there’s a reason the name is the same. The credit counseling services and the steps the certified credit counselor takes are very similar, often identical. The purpose of general consumer credit counseling is to explore options and find the best financial solution for you. The purpose of the pre-bankruptcy credit counseling requirement under the U.S. Bankruptcy Code is to make sure you have explored all of your options before determining that bankruptcy is the best option. A small percentage of people who go to credit counseling planning to file bankruptcy find other solutions after speaking with the credit counselor. And, some people who go to credit counseling without a specific solution in mind discover that bankruptcy is their best option.
Debt Relief Solutions
Of course, the best solution will vary depending on your goals and your specific financial difficulties. Your credit counselor may recommend that you consider a debt management plan, or that you speak with a bankruptcy attorney. If your financial problems aren’t too serious, the credit counselor may not recommend a program or a solution like bankruptcy. Instead, they provide you with educational materials and strategies for tightening up your budget and regaining control of your debt. Whatever your specific goals and challenges are, one thing stays the same. Your credit counselor will work with you to create an action plan. In other words, credit counseling isn't just about educating yourself. You will leave your session with clear next steps.
Your credit counselor may also review your credit report, and can tell you how each of the possible solutions may affect your credit score.
What is a Debt Management Plan?
Some of the solutions discussed in your credit counseling session may be steps you can take on your own. Some examples include creating and sticking to a budget or increasing household income. Others, like debt consolidation loans and bankruptcy, may mean getting help from someone other than the credit counseling agency. But, the credit counseling organization itself may offer you a debt management plan.
A debt management plan, or DMP, is generally used to resolve debts like personal loans and credit card balances. Some other types of unsecured debt, like medical bills, may also be included if the creditor agrees. Student loans can’t be included.
When you enter a debt management program, the credit counseling agency will try to get you a better deal. They’ll ask creditors to lower your payments and give you better interest rates. Instead of making separate payments to different creditors at different times of the month, you’ll make one monthly payment to the debt management plan administrator. This payment may include a small monthly fee for the credit counseling agency’s services.
A debt management plan doesn’t reduce the amount of debt. Rather, it is a debt repayment plan providing better terms, so you have lower monthly payments and spend less on interest and late fees.
While creditors like credit card companies will usually close accounts included in a debt management plan, some types of consumer credit may still be available. For example, some people who are making payments through a debt management plan find that they can get auto loans.
Finding the Best Debt Relief Solution for You
The most effective financial counseling is personalized. There is no one-size-fits-all solution to financial problems. A reputable provider will review your information, listen to your concerns, and work with you to find a solution that is workable for you. Nonprofit credit counseling agencies don’t charge for the initial session. So, you have nothing to lose by speaking with a counselor. The more you know, the better your chances of finding the right path to a debt-free life.
Upsolve Helps People Conquer Debt
Upsolve is a nonprofit organization committed to helping people across the United States get out of debt. The core of our service is offering free help to people who want to file Chapter 7 bankruptcy without an attorney. Our website is rich with information about important issues like who is eligible for Chapter 7 bankruptcy and how the automatic stay can offer you instant relief from debt collectors. But, we know that everyone’s needs are different. You will also find a lot of information about other options for getting out of debt, along with information to help you determine which type of solution might be best for you.
If you’re just beginning to explore your options or are looking for a debt management plan, we can help you connect with a nonprofit credit counseling agency in your area. If you want to file for bankruptcy but don’t qualify for our services or want to learn more about Chapter 13 bankruptcy, you can find a local bankruptcy attorney on our website.