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L
iving paycheck to paycheck? Worried about debt
collectors? Can’t seem to develop a workable budget,
let alone save money for retirement? If this sounds
familiar, you may be considering the services of a credit
counselor.
Most reputable credit counselors are non-profit and
offer services at local offices, online, or on the phone.
If possible, find an organization that offers in-person
counseling. Many universities, military bases, credit
unions, housing authorities, and branches of the U.S.
Cooperative Extension Service operate non-profit credit
counseling programs. Your financial institution, local
consumer protection agency, and friends and family also
may be good sources of information and referrals.
But be aware that “non-profit” status doesn’t guarantee
that services are free, affordable, or even legitimate. In
fact, some credit counseling organizations charge high
fees, which they made hide; others might urge their clients
to make “voluntary” contributions that can cause more
debt.
Choosing a Credit Counseling
Organization
Reputable credit counseling organizations can advise you
on managing your money and debts, help you develop
a budget, and offer free educational materials and
workshops. Their counselors are certified and trained
in consumer credit, money and debt management, and
budgeting. They discuss your entire financial situation
with you, and help you develop a personalized plan to
deal with your money problems. An initial counseling
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session typically lasts an hour, with an offer of follow-up
sessions.
A reputable credit counseling agency should send you
free information about itself and the services it provides
without requiring you to provide any details about your
situation. If a firm doesn’t do that, consider it a red flag
and go elsewhere for help.
Once you’ve got a list of counseling agencies you
might do business with, check each one out with your
state Attorney General (www.naag.org) and local
consumer protection agency (www.usa.gov/directory/
stateconsumer/index.shtml). They can tell you if
consumers have filed complaints about any one of them.
(If there are no complaints about them, don’t consider it
a guarantee that they’re legitimate.) The United States
Trustee Program also keeps a list of credit counseling
agencies approved to provide pre-bankruptcy counseling
(www.justice.gov/ust/eo/bapcpa/ccde/cc_approved.
htm). After you’ve done your background investigation,
you will want to interview the final “candidates.”
Questions to Ask
Here are some questions to ask to help you find the best
counselor for you.
● What services do you offer? Look for an
organization that offers a range of services,
including budget counseling, and savings and debt
management classes. Avoid organizations that push
a debt management plan (DMP) as your only option
before they spend a significant amount of time
analyzing your financial situation.
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● Do you offer information? Are educational
materials available for free? Avoid organizations
that charge for information.
● In addition to helping me solve my immediate
problem, will you help me develop a plan for
avoiding problems in the future?
● What are your fees? Are there set-up and/or
monthly fees? Get a specific price quote in writing.
● What if I can’t afford to pay your fees or make
contributions? If an organization won’t help you
because you can’t afford to pay, look elsewhere for
help.
● Will I have a formal written agreement or
contract with you? Don’t sign anything without
reading it first. Make sure all verbal promises are in
writing.
● Are you licensed to offer your services in my
state?
● What are the qualifications of your counselors?
Are they accredited or certified by an outside
organization? If so, by whom? If not, how are
they trained? Try to use an organization whose
counselors are trained by a non-affiliated party.
● What assurance do I have that information about
me (including my address, phone number, and
financial information) will be kept confidential
and secure?
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● How are your employees paid? Are they paid
more if I sign up for certain services, if I pay a fee,
or if I make a contribution to your organization?
If the answer is yes, consider it a red flag and go
elsewhere for help.
Debt Management Plans
If your financial problems stem from too much debt or
your inability to repay your debts, a credit counseling
agency may recommend that you enroll in a debt
management plan (DMP). A DMP alone is not credit
counseling, and DMPs are not for everyone. Don’t sign
up for one of these plans unless and until a certified credit
counselor has spent time thoroughly reviewing your
financial situation, and has offered you customized advice
on managing your money. Even if a DMP is appropriate
for you, a reputable credit counseling organization
still can help you create a budget and teach you money
management skills.
How a DMP Works
In a DMP, you deposit money each month with the credit
counseling organization. It uses your deposits to pay your
unsecured debts, like your credit card bills, student loans,
and medical bills, according to a payment schedule the
counselor develops with you and your creditors. Your
creditors may agree to lower your interest rates or waive
certain fees. But it’s a good idea to check with all your
creditors to be sure they offer the concessions that a credit
counseling organization describes to you. A successful
DMP requires you to make regular, timely payments; it
could take 48 months or more to complete your DMP.
Ask the credit counselor to estimate how long it will take
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for you to complete the plan. You may have to agree not
to apply for — or use — any additional credit while you’re
participating in the plan.
Is a DMP Right For You?
In addition to the questions already listed, here are some
other important ones to ask if you’re considering enrolling
in a DMP.
● Is a DMP the only option you can give me? Will
you give me on-going budgeting advice, regardless
of whether I enroll in a DMP? If an organization
offers only DMPs, find another credit counseling
organization that also will help you create a budget
and teach you money management skills.
● How does your DMP work? How will you make
sure that all my creditors are paid by the applicable
due dates and in the correct billing cycle? If a DMP
is appropriate, sign up for one that allows all your
creditors to be paid before your payment due dates
and within the correct billing cycle.
● How is the amount of my payment determined?
What if the amount is more than I can afford? Don’t
sign up for a DMP if you can’t afford the monthly
payment.
● How often can I get status reports on my
accounts? Can I get access to my accounts online
or by phone? Make sure that the organization you
sign up with is willing to provide regular, detailed
statements about your account.
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● Can you get my creditors to lower or eliminate
interest and finance charges, or waive late fees?
If yes, contact your creditors to verify this, and ask
them how long you have to be on the plan before the
benefits kick in.
● What debts aren’t included in the DMP? This is
important because you’ll have to pay those bills on
your own.
● Do I have to make any payments to my creditors
before they will accept the proposed payment
plan? Some creditors require a payment to the
credit counselor before accepting you into a DMP.
If a credit counselor tells you this is so, call your
creditors to verify this information before you send
money to the credit counseling agency.
● How will enrolling in a DMP affect my credit?
Beware of any organization that tells you it can
remove accurate negative information from your
credit report. Legally, it can’t be done. Accurate
negative information may stay on your credit report
for up to seven years.
● Can you get my creditors to “re-age” my
accounts — that is, to make my accounts
current? If so, how many payments will I have to
make before my creditors will do so? Even if your
accounts are “re-aged,” negative information from
past delinquencies or late payments will remain on
your credit report.
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How to Make a DMP Work for You
The following steps will help you benefit from a DMP,
and avoid falling further into debt.
● Continue to pay your bills until your creditors have
approved the plan. If you stop making payments
before your creditors have accepted you into a plan,
you’ll face late fees, penalties, and negative entries
on your credit report.
● Contact your creditors and confirm that they have
accepted the proposed plan before you send any
payments to the credit counseling organization for
your DMP.
● Make sure the organization’s payment schedule
allows your debts to be paid before they are due
each month. Paying on time will help you avoid late
fees and penalties. Call each of your creditors on
the first of every month to make sure the agency has
paid them on time.
● Review monthly statements from your creditors to
make sure they got your payments.
● If your DMP depends on your creditors agreeing
to lower or eliminate interest and finance charges,
or waive late fees, make sure these concessions are
reflected on your statements.
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The Telemarketing Sales Rule
The Telemarketing Sales Rule (TSR), enforced by the
Federal Trade Commission, requires companies that sell
debt relief services to explain their fees and tell you about
any conditions on their services before you sign up; it also
prohibits companies that sell debt relief services by phone
from charging a fee before they settle or reduce your debt.
For credit counseling that promises to get you into a DMP,
that means the company cannot collect a fee until you
have entered the DMP and made at least one payment to
your creditors using the DMP.
Other Debt Relief Options
Working with a credit counseling organization is just
one option for dealing with your debt. You also could:
negotiate directly with your credit card company, work
with a debt settlement company, or consider bankruptcy.
Talk with your credit card company, even if you have
been turned down before. Rather than pay a company to
talk to your creditor on your behalf, remember that you
can do it yourself for free. You can find the telephone
number on your card or your statement. Be persistent and
polite. Keep good records of your debts, so that when
you reach the credit card company, you can explain your
situation. Your goal is to work out a modified payment
plan that reduces your payments to a level you can
manage.
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If you don’t pay on your debt for 180 days, your creditor
will write your debt off as a loss; your credit score will
take a big hit, and you still will owe the debt. Creditors
often are willing to negotiate with you even after they
write your debt off as a loss. For information, read How
Credit Scores Affect the Price of Credit and Insurance at
www.consumer.ftc.gov.
Bankruptcy. Declaring bankruptcy has serious
consequences, including lowering your credit score, but
credit counselors and other experts say that in some cases,
it may make the most sense. Filing for bankruptcy under
Chapter 13 allows people with a steady income to keep
property, like a mortgaged house or a car, that they might
otherwise lose through the Chapter 7 bankruptcy process.
In Chapter 13, the court approves a repayment plan that
allows you to pay off your debts over a three to five year
period, without surrendering any property. After you
have made all the payments under the plan, your debts are
discharged. As part of the Chapter 13 process, you will
have to pay a lawyer, and you must get credit counseling
from a government-approved organization within six
months before you file for any bankruptcy relief. For
more information, read Filing for Bankruptcy: What to
Know at www.consumer.ftc.gov.
You can find a state-by-state list of government-
approved organizations at the U.S. Trustee Program
(www.justice.gov/ust), the organization within the U.S.
Department of Justice that supervises bankruptcy cases
and trustees. Also, before you file a Chapter 7 bankruptcy
case, you must satisfy a “means test.” This test requires
you to confirm that your income does not exceed a certain
amount. The amount varies by state and is publicized by
the U.S. Trustee Program.
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Filing fees are several hundred dollars. Attorney fees are
extra and vary. For more information visit the United
States Courts (www.uscourts.gov/FederalCourts/
Bankruptcy.aspx), and read Coping with Debt at
www.consumer.ftc.gov.
Debt settlement. Debt settlement programs typically
are offered by for-profit companies, and involve them
negotiating with your creditors to allow you to pay a
“settlement” to resolve your debt — a lump sum that
is less than the full amount that you owe. To make that
lump sum payment, the program asks that you set aside
a specific amount of money every month in savings.
Debt settlement companies usually ask that you transfer
this amount every month into an escrow-like account
to accumulate enough savings to pay off any settlement
that is eventually reached. Further, these programs often
encourage or instruct their clients to stop making any
monthly payments to their creditors.
Although a debt settlement company may be able to settle
one or more of your debts, these programs can be very
risky and have serious negative financial consequences for
consumers. Additionally, some debt settlement companies
deceive consumers by making promises they do not keep
and engaging in other illegal conduct (like charging fees
before obtaining any settlements, in violation of the TSR).
For information, read Coping with Debt and Settling
Credit Card Debts at www.consumer.ftc.gov.
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For More Information
The FTC works to prevent fraudulent, deceptive and
unfair business practices in the marketplace and to provide
information to help consumers spot, stop and avoid them.
To file a complaint or get free information on consumer
issues, visit ftc.gov or call toll-free, 1-877-FTC-HELP
(1-877-382-4357); TTY: 1-866-653-4261.
Watch a video, How to File a Complaint, at ftc.gov/video
to learn more. The FTC enters consumer complaints
into the Consumer Sentinel Network, a secure online
database and investigative tool used by hundreds of civil
and criminal law enforcement agencies in the U.S. and
abroad.
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Federal Trade Commission
ftc.gov
November 2012
