Dealing with Debt: 8 Tips to Find a Qualified Credit Counselor

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If creditors call at all times of day, you're behind on bill payments and can't seem to climb out of a financial hole, this article is for you. 

Dealing with debt collectors can be frustrating and frightening but many are concerned about how filing for bankruptcy or working with a credit counselor will look. You wouldn't think twice about seeing a doctor when you're ill, so why not work with a credit counselor when your finances are under the weather? 

More than a million people every year file personal bankruptcy while millions more do nothing and end up with ruined credit and lots of stress. Going to a pro for help may not be your proudest moment, but there are definitely a lot worse things that could happen.

But how do you know when a counselor will work in your best interest? We've put together 8 tips to help you understand and select a credit counseling agency that is right for you.

1. How it Should Work
A qualified credit counseling agency should counsel you regarding all your debts and present you with all your options before you do anything that you can't undo. In other words, they should counsel you, not slam you into the only fix that makes money for them.

2. Credentials
Look for a credit counseling agency that belongs to one of two trade associations: the National Foundation of Credit Counselors (NFCC), or the Association of Independent Credit Counseling Agencies (AICCCA). You can find NFCC members near you at their Find a Counselor Now page. You can find AICCCA members near you by using their state by state lists. 

Check the BBB or other online sources for complaints and interview more than one agency. This makes it's easy to distinguish between objective counselors and those who operate like used-car salesmen.

3. Fees
The credit counseling agency you select should be non-profit so ask about fees before you start working with them. Most agencies provide free advice, but you'll typically pay a small monthly fee to set up your DMP (free to $50) and a monthly fee (five to 10 percent of your debt payment with a $25 to $50 cap).

4. How Counselors Make Money
Your monthly fees aren't enough to keep an agency alive. Banks pay counselors a percentage of the money they've collected from you on the bank's behalf. The percentage received has declined of late, so some major banks are now handing out grants to agencies. 

Obviously, your adviser has a powerful incentive to collect the most money from you so their "commission" is higher. You may want to consider another option, like repaying your debt without a DMP or declaring bankruptcy, if you're not happy with their advice. Still, it's worth checking out agencies as many dispense honest and objective advice. Watch out, however, for DMP mills, which typically do a lot of advertising and put virtually all their clients on a DMP simply to make money.

Non-profit agencies are funded through various sources, including voluntary contributions from creditors, local grants from private sources and foundations, and client fees and contributions.

5. Services Offered
Ask about the range of services an agency supplies, including budget counseling as well as 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. A counselor or agency also should provide free educational materials. Avoid agencies that charge for such materials.

6. Getting Started
When you contact an agency, you will be advised of any information you need for your counseling session. You will be able to gather your financial documents and other relevant information together and receive professional help in-person, by phone, by mail, or online. 

7. Debt Management Program
Credit counseling agencies or organizations help you develop a Debt Management Program, or DMP, which effectively allows them to serve as an intermediary between you and the people you owe. They'll contact your credits and negotiate to lower the interest rate, waive penalty fees, reduce the total amount you owe, and establish a monthly payment plan you can actually afford. Once you've established a plan, you'll send a single monthly check to the counseling agency, which will divide the money among your creditors. A standard DMP runs three to five years. 

8. Bankruptcy
If your debt includes bills that don't qualify for a DMP, such as a mortgage or car loan, you may be better off filing for bankruptcy than developing a DMP. An agency can help you through this process, with the amount of assistance provided dependent upon your income. Most agencies offer free education programs and a one-time meeting with a counselor, who provides you with a detailed report of options you've discussed.

The agency will help you decide whether to file for a Chapter 7 or Chapter 13 bankruptcy. Chapter 13 allows those with regular income to repay debts over three to five years. This drags things out a bit but it stops foreclosures. If you're behind on your mortgage, a Chapter 13 will allow you to keep the house and catch up on payments over time. Those without regular income must file Chapter 7, which involves no payment plan but won't stop foreclosure. It will wipe out debts such as credit-card balances and medical bills but it's not a free pass.