Does Credit Counseling Help?

Advertisements on television, in the newspaper and on the radio often tout credit counseling as the panacea that can cure all of your financial woes. While credit counseling programs are beneficial for those whose debt management difficulties stem from a lack of organization and an inability to properly budget their income, these programs don't help everyone.

How It Works

Credit counseling agencies employ counselors that evaluate consumers' financial situation and recommend solutions to a variety of debt-related problems. A credit counselor can help you construct a more efficient budget to avoid spending more than you can afford each month and to pay off overdue debts. Credit counseling agencies also often offer workshops and seminars designed to better educate debtors about money-management techniques.

Special Services

For those whose carry too much debt to repay on their current income, credit counseling agencies offer debt management plans. Specific qualifications for enrollment in a DMP, such as the amount of money you must owe or how delinquent your accounts must be, vary depending on the company, but typically if your disposable income does not provide you with enough money to repay your creditors, enrolling in a DMP is an option. Through a DMP, the credit counseling agency works with your creditors to either reduce your balance, lower your payments or both. After enrolling in a DMP, you submit payments to the credit counseling agency, which will then distribute the payments to your creditors.

The Goal

The goal of any credit counseling program is to teach you how to get out of debt and stay out of debt. Many consumers are able to do just that. MSN Money notes that, according to the National Foundation for Credit Counseling, one-third of all consumers that sought credit counseling in 2009 were able to successfully manage their own finances and budget after only one counseling session.

Problems With Counseling

While credit counselors can attempt to negotiate with creditors through a DMP, that negotiation is not always successful. Creditors are not under any obligation to modify an individual's repayment plan or outstanding balance. In addition, credit counseling isn't a free service. Most credit counseling agencies -- even those that are nonprofit -- charge fees for their services. Companies that charge high fees can make a consumer's financial situation worse rather than better.

Pre-bankruptcy Counseling

Whenever you file for personal bankruptcy, regardless of whether you do so under Chapter 7 or Chapter 13, you must obtain credit counseling through an approved credit counseling agency before the court will discharge your bankruptcy case. The goal of pre-bankruptcy credit counseling isn't necessarily to prevent the bankruptcy from taking place, but rather to ensure that you do not repeat the financial behavior that made filing for bankruptcy necessary once the bankruptcy is over. A list of credit counseling agencies approved to provide pre-bankruptcy counseling services is available through the U.S. Department of Justice Trustee Program (see Resources).