About Consumer Debt Counseling

If you're drowning in debt, receiving calls from creditors or debt collectors, or just concerned that your debt is getting out of control, consumer credit counseling can help you take control of your finances and understand how you got into debt in the first place -- and how to get out of it.

However, debt and credit counseling can land you in more debt trouble than you're already in if you do not choose the right counselor.

Credit Counseling

The goal of credit counseling is to help you understand how to use credit wisely. Sessions with a credit counselor should include information that addresses making a budget, living within your means, setting financial goals, paying off existing debts and taking on new debt carefully. This information can come in the form of classes offered by the credit counseling agency, online tutorials or printed materials.

Debt Management Plans

Depending on your financial situation, you might be offered a debt management plan by the credit counseling agency. When you agree to a debt management plan, the credit counselor works with you and your creditors to create a payment arrangement that gets you out of debt without leaving you penniless. Creditors usually agree to a lower monthly payment or reduced fees and interest rates for the duration of the debt management plan, which typically lasts three to five years. While enrolled in the debt management plan, you pay the credit counseling agency the combined amount of your monthly debts, and the agency makes the payments for you. A reputable credit counseling agency will charge a nominal fee for a debt management plan.

Bad Business

As consumer debt has grown, so has the consumer credit counseling field. So, too, have the number of credit counseling agencies that make a significant profit by charging fees for their services.

The Federal Trade Commission's website warns consumers to "Beware -- just because an organization says it is 'nonprofit' doesn't guarantee that its services are free or affordable, or that its services are legitimate."

Predatory credit counseling, in the form of nonprofit organizations that claim to be able to repair your credit instantly, or settle your debts for pennies on the dollar in exchange for high fees has become so widespread that the FTC, IRS and other organizations have issued alerts warning customers against these agencies.

Choosing a Counselor

To avoid being ripped off by credit counseling organizations, do your homework before setting up a phone or in-person appointment. Check the National Foundation for Credit Counseling's website (see Resources) for a list of reputable credit counseling agencies in your area. Then, call your state attorney general's office to check whether any complaints have been lodged against the agency you choose.

If you agree to a debt management plan, contact each of your creditors yourself for something in writing stating that they agree to the debt management plan. Call each month to ensure that your bills are being paid.

Debt Relief

Credit counseling and debt management plans can help those who are overwhelmed with debt get back on solid ground financially and avoid bankruptcy, which can affect your ability to get credit for up to 10 years. Reputable credit counseling agencies aim to increase your financial knowledge, helping you to make better decisions about money and debt in the future.