In Over Your Head—Life-Saving Strategies for Financial Crisis

Bulletin 891

Section 4: Credit-counseling services

Financial problems can arise for a variety of reasons. Perhaps you have had illness in the family and were caught without insurance or the necessary savings to pay mounting bills. Maybe you have lost your job and you are unable to find employment which will cover your expenses. When you are desperate and feel you have no place to turn, one possibility is to seek financial counseling. There are several factors to consider when deciding whether financial counseling is an appropriate course of action for you. This information may also be useful when choosing a counseling agency.

What to expect

• When you meet with the budget counselor, you will develop a budget plan that meets your minimum living expenses and debt repayment requirements. At this point you will decide whether you want to participate in a debt-management plan or whether you will use the counselor's suggestions and educational resources to manage your debt on your own. (See Section 3, Self-directed repayment plans.)
• If you decide to use a counselor's debt-management plan, one of the first actions you will take is to cut up your credit cards and return them to the creditor. You must agree that you will not use or apply for additional credit. You should write to the creditor and have your account closed.
• Based on the budget you and the counselor work out, each month you will send money (by money order, payroll deduction, or automatic check withdrawal rather than a personal check) to the counseling agency. The agency will distribute payments to your creditors according to the schedule developed by you and the counselor. To be successful, your repayment plan must be paid regularly and in a timely way. This plan may be extended for as long as 48 months or until the debt is retired. While you are participating in a debt-management program, some creditors may agree to reduce or suspend interest charges.

Differences between debt management, trusteeship, and chapter 13 bankruptcy

• The three are similar in that you develop a budget and plan or schedule to repay your debts by making one monthly payment to a third party who then pays your creditors. Trusteeship is usually obtained when a demand has been made following a garnishment, attachment or aid of execution, and you contact the county court or municipal court where you live or (if you reside outside Ohio) where you work. You may then choose trusteeship or a debt counseling service as a method of paying creditors.
• There is a fee for both credit counseling and bankruptcy services. Consumer counseling may charge up to $300. This fee may be waived if you can't afford it. If you file a Chapter 13 bankruptcy, you will have to pay the $185 filing fee plus attorney fees. If the clerk of court acts as trustee, the court is not compensated.
• If you miss a payment to a consumer counseling service or to the trustee, your creditors can start collection actions against you. If you miss a payment during your bankruptcy plan you are protected from creditors.
• Most consumer counseling programs require payment of the debts in full and many of the creditors continue to charge interest. In Chapter 13 bankruptcy, you will usually pay a percentage of the full amount you owe.
• If you have entered into an agreement with a debt-counseling agency or if you apply to your local municipal or county court for the appointment of a trustee to receive the part of your earnings that is not exempt from garnishment, you may protect yourself from future garnishments. However, a creditor can state an objection (in writing) to your participation in this debt-management plan and can be excluded from the agreement. Filing a Chapter 13 or Chapter 7 bankruptcy provides an "automatic stay" that prevents creditors from seizing your assets or taking other actions to obtain payment.

Debts not covered in the plan

• Debt-repayment plans usually cover unsecured debt such as credit cards. Your auto and home loans are considered secured debt and are probably not included in the repayment plan. You will have to continue payments to these creditors yourself.
• If you fall behind on your car payments, most financing agreements are written to allow the creditor to repossess your car, without notice, anytime you default. If your car is repossessed, you will still have to pay the full balance due on the loan as well as towing and storage costs. If you can't pay the balance, the creditor may sell the car. If the car is sold for less than the amount you owe, you will be required to pay the difference.
• If you think you might default, you may be better off trying to sell the vehicle yourself to pay off the debt. By doing so, you can avoid costs of repossession and a negative entry on your credit report.
• You should contact your home mortgage lender as soon as possible to avoid foreclosure on your home. If lenders feel you are acting in good faith and the situation is temporary, most are willing to work with you. They may allow you to reduce or suspend your payments for a short time. However, when you begin making regular payments, you may have to pay an additional amount to catch up the overdue amount. Some lenders may consider changing the terms of the mortgage by extending the repayment period. This will reduce the monthly payments. Find out what fees are charged for these changes.

Credit counseling and your credit report

• If you have been late in making payments on credit accounts, this information has probably been reported by your creditors. Under the Fair Credit Reporting Act, accurate information will remain on your credit record for up to seven years. When you are enrolled in a debt-management program, your creditors will probably report information about the accounts in your repayment plan. They may report that the account is in a debt-management plan with a financial-counseling agency, that your debt has been restructured, or that the debt has been written off. In the future, potential creditors, employers, or insurance companies may or may not consider debt-management or bankruptcy to be negative information.
• Beware of organizations who offer "credit repair" or schemes to get rid of bad credit. No one can remove accurate information from your credit file. Negative information will remain on your report for seven years. Bankruptcies will likely be reported for 10 years.

Evaluating a credit counselor

• Find out if this agency specializes in credit counseling. Talk with someone who has used the service. If this isn't possible, contact a local legal services agency or the state attorney general's consumer information number for information. In Ohio the number is 1-800-282-0515.
• Is this a nonprofit or for-profit organization? (Non-profits are usually more consumer-friendly.)

  How is the organization financed?

  Who pays for the services? (This tells you whether they are serving your interests or the creditors' interests.) Some non-profits charge a small fee to the consumer and also receive funds from creditors. The agency may receive up to 15 percent of each payment they collect from the creditors. Your account should, however, always be credited with 100 percent of the amount you pay through the agency whether or not your creditor contributes to the agency. Ask them the following questions:

  • How much will it cost? Some credible agencies may charge nothing or a small fee (approximately $20–$50) for their service, but this is usually voluntary. Most reputable agencies will not turn people away when they can't afford the fee. Don't use an agency that charges several hundred dollars.
  • Does the agency pay your creditors directly or do you? How will you know that your payments are made promptly to your creditors? Look for an agency that provides monthly reports. These reports allow you to track the payments to your creditors and let you see your progress.
  • How will the organization work with you? If they provide classes or one-to-one assistance, work with you face to face, by phone, by fax, or e-mail, you should choose an agency that operates in a way that is comfortable for you.
  • How does this organization discuss bankruptcy? If bankruptcy is not mentioned as a possible solution along with other options you should ask questions. Sometimes bankruptcy is the best solution. A credit-counseling agency that won't recommend bankruptcy when it is the best alternative is the same as an attorney who only suggests bankruptcy when there may be a better solution to your financial problem.
  • What qualifications do the counselors have? There are credentials offered by the National Foundation for Consumer Credit and the Institute for Personal Finance. Counselors trained by these organizations must pass examinations and subscribe to a code of ethics. Ask about the training the agency requires of its counselors.

How to contact a good credit-counseling agency

• Look for a nonprofit consumer counseling agency. Some of the better known agencies include:

  National Foundation for Consumer Credit and its affiliated agencies: Consumer Credit Counseling Services, 8611 2nd Avenue, Suite 100, Silver Springs, MD 20910. Call (800) 388-2227 or (301) 589-5600 to locate members in your community. On-line, look for: www.nfcc.org.

  Myvesta is an Internet-based organization which provides debt management and education. Call (800) 680-3328. On-line, look for www.myvesta.org.

  Consolidated Credit Counseling Services offers help by phone at (800) SAVEME2 [(800) 728-3632]; or by Internet at www.debtfree.org.

  Money Management International offers counseling by phone, fax, e-mail or letter. Call (800) 762-2271 or look for www.moneymanagementbymail.org on-line.

• Search the Internet for nonprofit debt counseling agencies. The organizations listed on the previous page are a good place to start.
• Contact one of the more than 3,000 offices of the Extension Service across the country. In some communities, Extension provides education and information on debt management. In most cases Extension does not act as a third party distributing payment, however, they can direct you to a reputable agency. Look for a link to your local community on www.reeusda.gov/1700/statepartners/usa.htm or in Ohio www.ag.ohio-state.edu/distcoun.html .
• Contact the United Way or Chamber of Commerce for information about local services.
• Check under "Credit- and debt-counseling services" in the yellow pages of your phone directory.

When under financial stress, your decision making skills will be pressed to the limit. Make sure you think through all your financial choices. You do have options. Consider all the consequences carefully when choosing between a debt-management plan offered by a credit counselor or court trustee, other self-help solutions or bankruptcy. Decide what course of action will be best for you in the long run.

References:

Leonard, Robin. Money Troubles: Legal Strategies to Cope with Your Debts. Nolo Press, 1995.

Ohio Revised Code - Sections 2329.70, 2716.02 and 2716.03.

Tyson, Eric. Personal Finance for Dummies, 2nd Edition. IDG Books Worldwide, Inc., 2000.

Sheldon, John and Klein, Gary. Surviving Debt, A Guide for Consumers. National Consumer Law Center,1996.