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When You Need Credit/Debt Counseling – Who Can Help and Who Will Only Help Themselves?

By Remar Sutton, DCU StreetWise Spokesperson

In the 1990's times were good for most workers and families. Good paying jobs were plentiful, credit card companies were handing out accounts like candy, and many consumers spent like there was no tomorrow. For many of these over-extended folks, tomorrow has arrived. They are now struggling to pay off a mountain of debt.
Even with sound financial planning, however, crisis sometimes looms – job loss, illness, divorce, or a death in the family, for instance, can change one's personal financial situation radically. When you find yourself facing such financial emergencies all those debt consolidation, debt management, and credit counseling ads on TV and the Internet begin to sound like a great deal. Are they? Are there other options for help?

The world of credit counseling and debt management services
Although considered one big field, emergency credit counseling services or companies fall into two distinct camps:
  • The traditional Consumer Credit Counseling Services (CCCS) have been around a long time and are affiliated with the National Foundation for Credit Counseling, which helps set standards for training and services. These nonprofit organizations have typically provided hands-on, face-to-face free credit counseling and budget planning and access to free or very low cost debt management plans.
  • Independent credit-counseling agencies, many of whom seem to focus primarily on marketing "debt management plans" have emerged in recent years as consumer debt has grown. These organizations have typically used television advertising and other mass-marketing techniques to attract clients. They tend to provide most of their service over the phone or online. Although set up as "non-profits," some of these groups, as Consumer Reports noted, "appear to be more interested in their own financial well-being than that of the debtors they're supposed to service." These companies in some instances do this by charging relatively high fees for administering a debt repayment plan, by paying their executives high salaries, and by steering clients to for-profit subsidiaries or related companies.
Traditional and independent credit/debt counseling companies are supported creditors
Historically, creditors returned an average of 15% of debt repaid through debt-management plans to the counseling services. This practice was economically worthwhile to the company because lots of money was repaid through these means, rather than lost to bankruptcy. In recent years the percentage returned by the creditors has shrunk to less than 10%, and more credit counseling services have begun to charge clients, opening the door to greater abuse.

Is a traditional consulting service better than the new more commercial independents?
In a major report in July 2001, Consumer Reports found that consumers could successfully complete debt repayment plans with both types of agencies and could experience problems and difficulties with both types. Rather than judge by type of agency, it is important to look carefully at specific services and policies of specific agencies or companies.

Tips for telling the potentially helpful agencies from the not-so-helpful
A helpful credit counseling service typically:
  • Offers a free initial consultation to discuss your financial situation including debts and assets thoroughly.
  • Provides counseling to help you design an action plan for free or for a modest fee.
  • When presenting a debt management plan, does not pressure you to take it as the primary solution.
  • Charges only a modest amount to administer a debt management plan.
  • Is conscientious about distributing payments to creditors and giving clients a means to track this payment.
  • Has staff with specialty training in credit, debt, budgeting, bankruptcy, etc.
  • Provides courteous, accessible communication with clients.
  • Has a good record with the Better Business Bureau and/or other consumer agencies.
A not-so-helpful credit counseling agency typically:
  • Charges for an initial consultation and/or offers a "consultation" that is basically a sales pitch to sign up for their debt management plan, or charges high fees for administering the debt management plan.
  • Does not help clients really analyze their financial picture and develop a thorough budget and action plan that may or may not include a debt repayment plan.
  • Pressures a potential client to sign up immediately for a debt repayment plan without adequate discussion of the total picture.
  • Promises no difficulties and complete satisfaction with everything.
  • Charges a large up-front fee such as 3% of total debt to set up a debt management plan, often calling this charge a "voluntary contribution" when it's anything but.
  • Features links to for-profit companies such as debt-consolidation loan companies.
  • Uses staff with inadequate or no training in credit, debt, budgeting, bankruptcy, etc.
  • Provides staff that's hard to reach, unresponsive, aggressive, threatening in tone, or otherwise hard to communicate with.
Debt Consolidation Loan Companies
Many of these for-profit companies run those little "get out of debt quick" ads in the newspaper or hawk these "services" on TV or the Internet. Their sales pitch makes them sound like a rich uncle and your best friend rolled into one company that's ready to solve your every financial worry with a "consolidation loan" or a "home equity loan." If you are tempted to call one of these numbers, run the other way – straight to your credit union. The companies that push these debt consolidation loans typically offer loans at higher interest rates and often build harsh terms, conditions and penalties into the loan that will not only cost you more money but in the case of a home equity loan can endanger your home-ownership.

Credit Union Credit Management Programs
Many credit unions offer very good credit management resources for their members. And they encourage members to take advantage of these services before the financial difficulties become an emergency. If an unexpected event such as job loss or sudden illness occurs, your credit union usually is ready to work with you, especially on loans and assets you have with them.
DCU, for example, offers a complete Financial Wellness and Recovery Program free for members. As part of a broad range of financial wellness related services, DCU provides members free access to BALANCE, which provides budget planning, credit-counseling, and other financial education services.
Even if your credit union does not offer access to BALANCE or a similar program, it can usually recommend a credit counseling service that's ethical, reputable and effective.

What about filing for bankruptcy as an alternative?
Bankruptcy poses some complex issues. And the new bankruptcy legislation pending in Congress promises to make these issues even more complex. We're going to devote a future Remar's Reviews to this subject, but for now let's note that most financial advisors recommend that you make filing for bankruptcy your last resort rather than your first or second.

Remar's Recommendation:
Whether financial storm clouds are gathering on your horizon or the storm has already broken, consult with your credit union as soon as possible. At the same time, do your homework. Educate yourself about credit and debt management starting with the resources on StreetWise. Be sure to check out any potential services before signing a contract – check with the Better Business Bureau, with consumer agencies, do an online search and review information you find with a critical eye. Make a plan.

So, what do you think?
If you find this review helpful, please pass the word to your friends. Also email me with any comments or suggestions.
Remar Sutton

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Digital Federal Credit Union
Digital Federal Credit Union
220 Donald Lynch Boulevard
PO Box 9130
Marlborough, MA 01752-9130
508.263.6700 • 800.328.8797
 DCU is an Equal Housing Lender    Your savings federally insured to at least $100,000 and backed by the full faith and credit of the United States Government. National Credit Union Administration, a U.S. Government Agency. Select for more information.

© 2008. Digital Federal Credit Union