How Does a Credit Counseling Service Work?
A credit counseling service will contact your creditors to whom you owe unsecured debt and negotiate a reduced interest rate or alternate monthly payment schedule. They can negotiate for reduced interest rates or the elimination of interest charges altogether. Some of the big services already have arrangements with thousands of creditors, particularly the large credit card companies, and so they can cut your interest rates over the phone in just a few minutes. In exchange, you must pay them a monthly fee to manage the program. This fee can range anywhere from $10 to $140 per month. The creditors allow the counseling service to keep a percentage of what they collect much like a debt collection service.
In addition, one must meet certain requirements to participate, meaning one must have a certain amount of debt in relation to monthly income. Not everyone is allowed to participate in a credit counseling service program particularly if one's creditors or the counseling service believes there is sufficient monthly income to cover payments on the debt.
Under the typical debt consolidation program, one payment is collected from you each month and used to make payments to all of your creditors who have agreed to the new interest rates and repayment terms. Under the plan, you agree to make regular and timely payments until the debt is paid off. Generally, the plan will take 48 months (four years) to complete.
What type of debt is covered in credit counseling?
Credit counseling services can typically help you with unsecured debt, such as credit cards (the most common type of debt); collection agencies; professional service bills (such as unpaid medical, dental, and attorney bills); unsecured bank loans and defaulted auto loans (amount still owed after repossession); IRS tax debt; student loans; utility (telephone, water, cable) bills and unpaid rent. You cannot get out of paying criminal fines, child support and the like.
Secured debt, such as your mortgage and auto loans, are not part of the repayment plan and you must continue paying this debt as agreed. If you have defaulted on these loans, the lenders will simply repossess the collateral; however, some credit counseling services can contact these lenders on your behalf and help you work out a plan to pay what is in arrears and avoid foreclosure or repossession.
