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Is Credit Counseling Just a Fancier Version of Debt Collection?

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Why you need credit counseling to manage your debt
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If you’ve found yourself in a tough financial spot, you may be considering credit counseling. It’s easy to lump all debt relief services into one category. But credit counseling is much different than debt collection. They actually couldn’t be more different. Here’s what you need to know about debt collection and credit counseling to help you through your financial hardship.

Debt Collection

Debt collection has one goal: recovering money for creditors. They are hired by all kinds of entities, including banks, credit card companies, hospitals, and other lenders. If you haven’t paid your account for an extended period of time, you’ve probably heard from a debt collector. They usually are persistent and call you multiple times a day, email you, and send letters. Sometimes they even reach out to your family members. It can get pretty predatory. This is because they usually don’t get paid unless the debt is resolved.

Debt collectors are also responsible for reporting your debt to credit bureaus. This is why it’s important to monitor your credit score for any accounts in collections. They may even take legal action against you. Before it escalates, you usually can work out debt settlement or payment plans. If you are diligent, you can resolve any debts before your credit is affected. Remember, debt collectors must adhere to the Fair Debt Collection Practices Act (FDCPA). But their role is not to help you out of debt, it’s to recover money for your lender.

Credit Counseling

Credit counseling helps individuals manage their debt and improve their financial health. These services are usually offered by nonprofit organizations or certified credit counselors. They can help you with many things, including budgeting help, debt management plans, and further financial education. A credit counselor can also help review your credit report with you and plan on how to improve your score. Overall, they work for you and want to see you succeed. Their goal is to help you get out of debt. All of their practices are ethical but beware of for-profit debt settlement companies. They may charge hefty fees for services. make sure you choose a reputable agency that is accredited.

The confusion usually begins when a credit counselor sets up a debt management plan for you. With this plan, you’ll make monthly payments to the agency, but this money goes directly to your debt collectors. Remember, credit counselors are working for you. They may negotiate lower payments or interest rates and can help settle your debt for a lower amount than what you owe.

Why You Should Use Credit Counselors

You shouldn’t be afraid to contact credit counselors. They are not debt collectors and are your ally. Ultimately, they will help you better manage your debt and eliminate it. There’s nothing in it for credit counselors other than to help you through difficult times. Debt collectors, on the other hand, are working for someone else. Their only goal is to get your money, so they may be less likely to negotiate or help you through financial hardships.

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What is a Debt Management Plan

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As you no doubt know, this is a blog about personal finance with a leaning towards getting yourself out of debt, staying out of debt, and learning how to handle the money you make once you’re out of debt.  There are lots and lots of ways to get out of debt.  My personal favorite is pretty close to the Dave Ramsey “Total Money Makeover” method.  Not everyone is willing or able to go “gazelle intense” and bust their debt down to nothing the TTM way though.  For some, they’ve gotten so far down into that debt black hole that they just don’t know where to start.  Those people will, more often than not, end up at a bankruptcy hearing long before they’ll be exclaiming “I’m debt free!” on the radio.

But, if you’re one of those people, there’s one last stop on the debt freefall before you declare bankruptcy.  Call it a last ditch effort if you will.  That stop is a Debt Management Plan.  Too often, the DMP is associated with shysters posing as financial advisors who promise to get you out of debt, while loading you up with fees on the backend.  The problem with a DMP that charges fees is that you are actually adding on extra debt as you try and pay off your debt.  But, there are some reputable places that do offer a free debt management plan.  There are some that will help you to pay off your debt without going into further debt and without declaring bankruptcy.

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What exactly is a debt management plan?  The administrator of a DMP acts as your agent.  They contact all of your debtors, like credit cards, auto loan lenders, etc…  and negotiate a payoff schedule with a payment that you can afford.  Usually, that payoff schedule will include some pretty significant drops in the interest rate as well.  You make one large payment to the DMP agency, and they distribute the payments out to your debtors.  At the end of the DMP, you’ve paid off all of those accounts.  Any good DMP will require that you don’t add any new debt while on the plan.  It also will include at least a minimal amount of counseling to help you avoid getting back into debt when you’ve finished with the debt management plan.

A debt management plan isn’t perfect.  It’s not the ideal way to get rid of debt, but for some, who are having issues getting their debt under control, or, issues making all their payments, they can be a valid way to go about doing so without the pain of bankruptcy.  Your credit will still take a hit, however.  Not nearly the hit that a bankruptcy would deliver, but the accounts will get reported as being negotiated.

In the end, if your choice is between a debt management plan and bankruptcy, I’d take the DMP any day.