Credit Counseling Services (continued)
Questions you should ask a credit counseling service
If you decide to seek credit counseling, don't just assume that every agency is a good one just because it is a non-profit. Some credit counseling companies are more ethical that others, however, never forget that most of them are in this business because it is highly profitable. Ask alot of questions and don't believe all the hype that will be thrown your way. Specifically, get answers to these questions:
(1) How does company derive its income (fees, contributions from creditors, grants)?
(2) How much training do the counselors have?
(3) How much time will I have discussing my problems with a counselor? (Should offer at minimum 90 minutes of counseling)
(4) What is involved in the counseling process and what information do counselors use to evaluate my situation?
(5) What are your fees for each service and what is the most I will have to pay? (A good sign that a company is not a good choice is if they are mainly concerned with you sending in an enrollment fee right away.)
(6) Will I be able to access my account information on a regular basis or perhaps online?
(7) Make sure you know which debts will not be covered in the plan before you sign up since some creditors do not participate in these plans.
(8) What guarantee is there that they will pay your creditors and that they will do it before the due date (this has been a serious problem in the past, so much so, that the FTC is currently investigating more than 50 counseling services for failure to pay creditors)
(9) Are they going to help you work out a budget and learn some basic debt management skills?
(10) Ask them if they are licensed.
(11) Ask them if counselors are paid based on the number of new clients they sign-up (if so, go somewhere else)
Read the contract thoroughly before signing it as you might find there are hidden sign-up fees. For example, a common complaint consumers have with credit counseling services is that they claim they were never told that their first two payments would not go to creditors; instead, they would go to the credit counseling service. Make sure this doesn't happen to you.
How Do I Find a Reputable Credit Counseling Service?
The consumer group who publishes Consumer Reports magazine recommends that debtors find a credit counseling services through their area Yellow Pages. Specifically, they recommend counseling services who are members of Consumer Credit Counseling Services (CCCS) which has a reputation of offering solid, affordable (or free) in-depth counseling. Find a local CCCS affiliated agency and receive an hour of free, no obligation credit counseling before you decide to sign-up with any credit counseling service. Don't want to sign-up with a credit counseling service or file bankruptcy? Consider negotiating directly with unsecured creditors and debt collectors for alternate repayment plans. Visit our Debt Settlements section.
The Negative Side of Credit Counseling
Before signing up with a credit counseling service consider the following facts:
About 60 percent of those who sign up for credit counseling drop out before completing the program and a significant number of drop-outs go on to file bankruptcy. Many debtors find the four year program to be too rigid and difficult to stick with, and those who stay with it and complete it find that they have no extra money each month. In other words, they're basically living paycheck to paycheck while most of there income is sent to pay creditors. It's not a fun way to live for four years, particularly, when one considers that most of the debt can be wiped out in a few months by filing Chapter 7 bankruptcy.
Although the ads for credit counseling services promise that your monthly bills will be lower, this isn't always true. Some people find their bills actually increase each month or decrease by as little as $10.00! The ads also don't tell you that not all of your creditors are willing to participate. More and more creditors, particularly the big credit card companies, are raising their standards for acceptance while lowering the fees they pay to credit counseling services. In fact, one of the "Big 10" credit card companies now requires all debtors to prove that they are in financial difficulty before accepting them into a new payment program. Another of the Big 10 credit card companies will actually raise your interest rate when you sign up for a credit counseling program.
There are too many dishonest credit counseling services in operation. Knowing that 60 percent of their clients will drop out of the program, they try to collect as much as they can upfront from debtors. Watch out for hidden fees written in the contract that allow the counseling service to keep all or most of the payments you make during the first few months as their fee. These agencies don't care about helping you get out of debt; they only want to collect $200 or $300 from you as quickly as possible knowing there is a good chance you will drop out soon. For the reasons above, the FTC and IRS have taken certain actions against credit counseling services.
Legal Actions Taken Against Credit Counseling Services
Ameridebt, once one of the nation's leading credit counseling services, was sued by both the Illinois and Missouri Attorney General offices filed suit against Ameridebt for fraudulent practices. In particular, Ameridebt was accused of defrauding its customers by charging millions in hidden fees and not forwarding payments on to creditors as agreed. The Federal Trade Commission filed suit against Ameridebt and the company is no longer in business.
Cambridge Credit Counseling and about 50 other credit counseling services were investigated or sued by the Federal Trade Commission and several states for dishonest practices. The FTC and IRS conducted investigations of credit counseling services to determine if they were operating as non-profit consumer-friendly organizations or are just scam organizations out to rip off the public. And, in 2005, the IRS audited all credit counseling agencies who claimed non-profit status. In May 2005, the IRS revoked the non-profit status of 30 percent of all credit counseling agencies they audited because they discovered that these companies were not the charitable organizations they were claiming to be, but rather, fronts for for-profit companies who were doing a poor job of providing debt management and credit counseling services to debtors. The IRS audits continue to uncover the sad fact that most of the debt counselors at these agencies have absolutely no training and are completely unqualified to dispense budgeting advice to anyone. Since 2005, the IRS has adopted stricter standards for evaluating whether or not a company is a true credit counseling service.
Credit Counseling and the Bankruptcy Code
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 requires those planning to file bankruptcy to obtain, at their own expense, credit counseling services from an approved credit counseling agency in the six months immediately before filing bankruptcy. A certificate of completion obtained from the credit counseling service must be submitted with the bankruptcy petition.
The cost for credit counseling varies -- from a low $20 to much higher. Some credit counseling agencies provide online counseling, meaning that one can complete the credit counseling requirement online and receive a certificate of completion by mail, and others require classroom attendance or personal sessions with a credit counselor. Because of the demand for credit counseling services --more than 1.5 million people file bankruptcy every year -- there are hundreds of credit counseling agencies from which to choose.
Court Approved Credit Counselors
The federal government provides an online list of credit counseling agencies approved pursuant to 11 U.S.C., Section 111 "Approved Bankruptcy Counselors". The list of approved credit counseling agencies is always changing, with counseling services being added and deleted on a regular basis. To find a certified counseling agency in your state and area, visit the Department of Justice website.