Information on Consumer Debt Counseling

Consumer debt counseling is a process that may help struggling consumers to manage and pay off their debt. Consumer debt counseling helps to make the debt more manageable while protecting a consumer's credit score from significant damage. Before beginning a debt counseling program, consumers should understand how these programs operate, what alternatives are available and what to look for from a provider.

How it Works

Consumer debt counseling includes a number of components designed to assist and educate consumers. When applying for help, consumers will provide information to the counselor on their income, debts and living expenses. The debt counselor will use this information to help the consumer develop a monthly budget, as well as negotiate with the creditors on the amount of the monthly payment and interest rate charged on the accounts. Consumers typically pay their debt payments in one monthly sum to the debt counselor who then pays the creditors. Debt counseling typically includes educational classes on financial topics designed to help consumers plan their financial future and avoid future debt.

Fees

The fees charged by a debt counseling service will vary depending on a number of factors. Many nonprofit debt counselors will even waive all fees in some situations. Consumers should avoid startup or monthly fees in excess of $50 or providers that keep the entire first month's payment as a fee. A reasonable monthly fee for the counseling services will be around $25, as of 2011. Debt counselors should provide written documentation of all fees to the consumer before services begin.

Choosing a Provider

The largest provider of consumer debt counseling services are nonprofit agencies affiliated with the National Foundation for Consumer Counseling, NFCC. While many companies in the debt counseling field have been targets of government investigations and sanctions, many NFCC affiliated providers receive referrals from government entities including bankruptcy courts and the Department of Housing and Urban Development. This does not mean that NFCC providers are the only legitimate choice, but affiliation is a positive indication. Before choosing any debt counseling provider, consumers should investigate the company with the Better Business Bureau and their state's attorney general.

Alternatives

The two primary alternatives to debt counseling are debt settlement and bankruptcy. In debt settlement, debt settlement providers negotiate a lower payoff amount with the creditor. In bankruptcy, consumers petition the courts for relief from their debt. In both cases, the consumer's credit score suffers, which may result in an inability to borrow for many years. A damaged credit score may also impact insurance rates, job opportunities and the ability to rent an apartment. Consumers may also successfully negotiate with creditors themselves.