Once a credit account becomes delinquent, the lender may hand the account over to a collection agency. Debt collectors then attempt to collect the total amount due. If you've fallen behind in payments and negotiations with collection agencies fall through, credit counseling may help. Credit counselors work with consumers by offering budgeting advice and negotiating with creditors.
Facts
Depending on your financial situation, credit counselors provide budgeting advice and explain your options in detail. When credit counseling involves a debt management plan, a counselor negotiates with your creditors to lower monthly payments and amounts owed by reducing interest rates and applicable penalty fees. Debt collectors are not required to work with or agree to a repayment plan, but most will. Charge-offs, bankruptcy or costly lawsuits are often the alternatives to repayment plans, and creditors are in the business of making money, not losing it.
Process
Under a debt management plan, you make monthly payments to the credit counselor, who then pays the debt collection agency. A payment plan is negotiated only after a careful examination of your budget. Under most plans, you sign a contract detailing how much you owe, your monthly payments and the repayment time frame. Failure to make payments under a debt plan may result in penalty fees, interest hikes and a resumption of debt collection attempts and calls.
Considerations
Most credit counseling services are not free and even nonprofit agencies may charge a fee. Shop around and look for agencies that provide services for fees based on your income rather than the amount you owe. Get credit counseling agreements and debt management plans in writing before you make payments. Investigate an agency's creditability by checking the Better Business Bureau and your state attorney general's office for consumer complaints. Compare the total cost of the program to your current financial obligations to make sure you're not adding to your debt.
Concerns
When you work with a credit-counseling agency, it may appear on credit report. Your credit report will show that the account was paid when the repayment plan ends, but repaying debt does not erase accurate negative marks on your credit report. You can request that a lender remove or change the information such as delinquencies or discharges once you pay the total amount due. The decision is entirely up to the lender, but a credit counselor may help negotiate credit-reporting changes as part of the repayment plan.
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