Will Creditors Deal With Credit Counselors If They Have Turned You Over to a Collection Agency?

Though state laws vary, most credit counselors help the consumer develop a manageable payback plan and implement it. The credit counselor also works with creditors to set up the newly structured payment plan on the client's behalf. Many consumers wait until their account has been sent to collection before turning to credit counselors; however, the collection agencies can work with the counselor to get the debt resolved.

Credit Counselor Defined

Credit counselors are agencies that work with in-debt consumers to implement a manageable repayment plan on the consumer's debts. In some states, credit counselors must be registered, while in other states they are not; therefore, it is important to research any credit counselor you consider hiring to be sure that agency is valid and aboveboard. Credit counselors are prohibited by law to encourage you to seek new credit in a new identity, promise to clear your credit in a short amount of time or extend any other information or ideas that are illegal or unethical.

Workings

Creditor counselors provide clients with education about avoiding bad debt. They also help clients develop a manageable repayment plan in which creditors are paid back but at a slower rate than dictated in the original terms. Credit counselors are also part of the federal bankruptcy law; however, in that instance the client is only required to take a 90-minute online, in-person or telephone course on financial management. With regular credit counseling, the client works with the agency to discover all debt, plot living expenses and determine a reasonable amount of money for a monthly payment toward creditors. The credit counselor typically contacts the creditors, lets them know the client is represented by the credit counseling agency and asks the creditor to deal with them from that moment on. The client signs a privacy waiver so the creditor knows the debtor authorized the agency to represent the client.

Collection Agencies

Creditors and collection agencies are under no legal obligation to work with a credit counselor, but a large majority of them do. In many cases, the debtor has turned to the credit counselor as a last resort, and the creditor knows if it refuses to work with the debtor's counselor on a repayment plan, the debtor may decide to file bankruptcy. A chapter 7 bankruptcy allows the debtor to walk away from most debts, so it is in the creditor's best interest to work with the credit counselor the debtor has chosen.

Credit Damage

Unfortunately, once the creditor turns the account over to a collection agency, the agency typically owns the account. After the account is turned over to a collection agency, there is generally a negative entry placed on the debtor's credit report. Hiring a credit counselor prompts a note in the debtor's credit file that the debts are being paid off through a credit counselor.