Our countries' current economic climate has caused consumer debt to be at an all time high. As a bankruptcy practitioner, I am reminded on a daily basis that many families across the country and right here on the North Shore are currently facing financial disaster. Credit card defaults, home mortgage foreclosures, car repossessions, are all at record high levels. According to the American Bankruptcy Institute, consumer bankruptcies peaked last year with a record 1.6 million cases filed.
Many consumers now seek alternatives to bankruptcy, an increasingly popular such alternative is commonly referred to as "Credit Counseling Services." Last year alone, 9 million families entered into credit counseling in an attempt to get their finances back on track. Clearly, it is a good idea to investigate any and all reasonable options and alternatives before electing to file bankruptcy, but a decision to enter into an agreement with a "credit counseling" agency must also be made, only after careful consideration. Despite the fact that many of these companies promise an appealing solution to the dilemma of over-indebtedness, all to often these agencies serve to only make a bad situation worse.
To begin with, it is important that consumers understand who these agencies are, how they operate and what they can and cannot do for a financially troubled client. Typically, when you meet with a debt counselor, he or she will review with you your income and expenses to create a monthly budget. Then, if there is some money left over at the end of each month ("disposable income"), all or a portion of this money will be sent to the counseling agency each month and they, in turn, will disburse the money to your various creditors.
In addition to the convenience of needing to make only one monthly payment. Credit Counseling agencies promise to attempt to get your creditors to lower the monthly interest rate that you are currently being charged, thus, saving you money on your monthly payments.
All of this sounds pretty good in theory. Unfortunately, the reality for many, the reality, is not so attractive. I frequently meet new bankruptcy clients who have attempted to use debt-counseling services but after their initial meetings, they were told that because they had no "disposable income," there was nothing that they could do for them and that bankruptcy might be their best or only alternative. I usually explain to these clients that their visit to credit counseling was not wasted because, if nothing else, it afforded them the opportunity to organize their economic situation and commit it to paper. For many, they had never previously calculated and written down their income, expenses and total debt. This first step is crucial and for many, is the most difficult step to take.
For those that do have sufficient income to negotiate a repayment plan with a credit counselor, statistics show that it is only a small minority of these consumers that succeed in completing the plan. Perhaps, this is because the expense budgets are typically rather tight and to complete the plan is often a very long commitment, often 5 to 7 years. Also, I am told by my clients that despite the promises they made, Consumer Credit Counselors were not able to get the majority of the clients' creditors to lower the interest rates in any significant amount.
Many of my bankruptcy clients come to me after having initiated a plan with a credit-counseling agency, but after a number of months or years, found it to be too difficult. When I meet a client in this circumstance I am impressed by their diligence in making every effort to pay their bills before considering bankruptcy. However, these clients are usually very frustrated when they discover the fact that if they had initially filed for bankruptcy rather than entering credit counseling, they would have saved a lot of money and by now, might very well have been finished with the bankruptcy, eliminated their debt and be well on their way to rebuilding their financial future.
Perhaps the most important fact to be aware of before electing to enter into a credit counseling program is that it will not help you to achieve a good credit rating. On the contrary, consumer credit counseling will generally affect your credit as badly as a bankruptcy, if not worse.
I recently attended a meeting of local real estate investors, bankers and lenders. During a discussion about credit, the lenders unanimously agreed that the very worst credit ratings they have ever seen were from applicants who had had been involved in credit counseling programs. They all viewed credit counseling as a derogatory mark on credit even worse than bankruptcy.
Be aware that despite the fact that some of these credit counseling agencies will charge you, a fee for their services, they are in large part funded by the credit card companies and as a result perform more like a collection agencies working for the creditors rather than you, the consumer. Don't be fooled into thinking that because a credit counseling service is certified as a "Non-Profit" agency that it necessarily has your best interests at heart. Credit Counseling services are, like every other business, primarily interested in profit. The fact that the IRS may have designated a company to qualify "Non-profit" status does not prevent officers, directors and employees of the corporation from making a fortune from your monthly payments. Beware of high cancellation fees, or "contributions." These funds only allow the Credit Counseling agencies to make money from you at a time you can least afford to spend it.
Although Credit Counseling can be helpful for some people, depending upon their individual situation, it is important to understand that some of these agencies are more legitimate than others. Currently, there are lawsuits pending against many credit-counseling businesses all over the country. The IRS has begun watching these companies more carefully to assure that they are acting within the boundaries of non-profit, tax-exempt status. Laws are beginning to change to protect consumers against unscrupulous consumer collection agencies. In the meantime, recognize that some of these companies are better than others. Be sure to read the fine print on any Credit Counseling Agreement and "caveat emptor," "buyer beware."
