Credit Counseling BasicsCredit counseling (Debt counseling in the UK variant) is the process of teaching a given debtor to avoid incurring debts that he is not able to repay.
In most cases, the main part of the credit counseling process is the attempt to convince a creditor to establish a special debt management plan (DMP) for the given debtor. This plan is aimed at constructing a repayment schedule that a debtor experiencing certain financial hardships will be able to afford. If the creditor is open for negotiation, the DMP worked out by your credit counselor will most probably include: reduced regular payments, lower fees and interest rates to the debtor. As it has already been stated before in other articles, the creditor will most probably agree to make a concession to a debtor on the verge of bankruptcy – at least to avoid losing its own money in case the debtor files for it.
Contents of the article: 1 Basic information about Debt Management Programs
2 Brief history of credit counseling
3 Criticism of credit counseling in the US
Basic information about Debt Management Programs As soon as a debtor resorts to the help of a credit counseling agency and joins a debt management plan, his/her credit card accounts will be closed and restricted to future charges. Most credit counseling agencies state the consolidation of different monthly payments into one (which is usually lower than the net sum of different individual payments) to be the most common benefit of a debt management plan. The reason for such a decrease in the owed amount is due to the fact that card creditors appear to be more willing to accept a lower monthly payment from a customer involved in a DMP than from a regular customer. Average reduction in the monthly payment for a debtor involved in DMP equals to 10-20% though this number can go up as high as 50% in some cases.
Another pleasant feature that a DMP opportunity offers is a reduced interest rate charged by the creditor. A debtor involved in DMP will get the opportunity to pay an interest rate approaching 30%. Plus, the creditors often agree to decrease the annual interest rate to as low as 5-10% for DMP users. The reduction of the interest payout usually leaves the DMP users debt-free in as short as 3-6 years while a repayment subject to high interest rates may take up to 20+ years
One more benefit available through the services offered by credit counseling agencies is the process of bringing delinquent accounts current (the process of “curing” an account). A given debtor can “cure” his/her account by making several payments according to the regular repayment schedule as a sort of a sign of a good faith and willingness to keep on with the repayment program. For instance, a person with a debt that is already 2 months past due may join the DMP and make three consecutive payments, thus returning his/her account into its current status. In this case the payment will be equal to the amount negotiated by the DMP while the status of the debt account will be reported as “current” to the credit bureaus. However, you shouldn’t remember that these reports will not eliminate the prior delinquencies already reported to the credit bureaus before. You can regard it as an opportunity to restart your credit history from a new beginning. Nevertheless, the only thing able to improve your credit history will be time, with the course of which the credit scores will be getting better and better.
Brief history of credit counseling The history of credit counseling dates back to 1951 when the first credit counseling agencies were established, triggered by the creation of The National Foundation for Credit Counseling (NFCC). At that time they were aiming at the promotion of financial knowledge and helping consumers to avoid bankruptcy. Originally, NFCC was started as an ordinary collection company helping a number of major creditors of that time to recover the money lost due to the bankruptcy of their debtors.
The Association of Independent Consumer Credit Counseling Agencies (AICCCA) was created in 1993 in attempt to establish “industry-wide standards of excellence and ethical conduct.” Soon AICCCA turned into NFCC’s rival. The main difference between these two organizations at that time was the business model – AICCCA representatives preferred delivering debt management programs by phone while the NFCC members strongly opposed it, claiming face-to-face counseling to be much more effective. Eventually, this competition resulted in both AICCCA and NFCC using both business models with same success.
Despite these two organizations being the oldest and probably the most famous, they are far not the largest ones. Currently, the biggest sector in the credit counseling market is occupied by the American Association of Debt Management Organizations (AADMO).
Current regulations do not require all credit counseling agencies to belong to one organization or another – at the moment there are well over 1,000 independent credit counseling agencies operating in the USA at the moment.
According to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, all consumer debtors filing in for Chapter 7 bankruptcy have to accept credit counseling. In order to meet this requirement, a debtor must complete a program with a state-approved non-profit credit counseling agency during the 6 months preceding the filing of bankruptcy. The first step of this program is a phone or Internet talk with a credit counseling practitioner. The filing of the bankruptcy is also followed by a debtor education counseling session that completes the bankruptcy process and discharges all of your debts.
The number of credit counseling agencies in Europe keeps on growing currently. The most prominent examples of such organizations include such for-profit and charity debt management companies as Christians Against Poverty and the Consumer Credit Counseling Service (United Kingdom).
Criticism of credit counseling in the US There has been a significant growth in the number of credit counseling agencies recorded in the USA during the late 1980’s and early 1990’s. The presence of creditors was detected on the NFCC’s Board of Directors, triggering an antitrust lawsuit against this organization. The judgment ordered the creditors to fund their own, independent non-NFCC member agencies.
The increase in the number of credit counseling agencies led to the worsening of the quality of the services offered out by them. By the beginning of 1990’s the abusive activity of some of these agencies aroused a wave of criticism aimed at the industry as a whole.
Usually a credit counseling company gets financed by the creditors to whom the debt payments are forwarded as the result of a successful DMP. This funding made most people believe (not without a reason) that CCC agencies were nothing more than regular collection departments of certain credit-issuing enterprises. Originally, the creditors used to pay a contribution of 15% of each returned debt to the credit counseling agencies (“Fair Share”). However, during the past years the amount of the “Fair Share” decreased rapidly, coming down to a minute amount of 4-10% off each repayment.
However, the NFCC still keeps on claiming bankcard companies to be their major constituents. Plus, this organization promotes the fact that in collects $5 billion value of delinquent debts for the creditors, simultaneously doing its best to protect the debtors from bankruptcy.
The number of complaints from the clients of various credit counseling agencies is extremely high – and it only keeps on growing (the Federal Trade Commission has received overwhelming 8,000 complaints about CCC’s, most stating high or hidden fees and the inability to opt out of so-called “charity” investments). These complaints served as the basis for a number of lawsuits being filed against certain credit counseling companies. The level of complaints against credit counseling firms recorded by the Better Business Bureau is also extremely high.
The complaints directed against credit counseling firms even made the IRS deny nonprofit 501(c)(3) tax-exempt status to over 30 credit counseling agencies in the USA (the total number of active CCC agencies in the USA is currently around 1,000).
The representatives of the debt collection industry are also irritated with the financial and marketing advantage, which credit counseling agencies have over them due to their non-profit status, and which they think to be unfair. Such attitude is apparently supported by the IRS. The tax-exempt status of credit counseling companies is most often centered around whether they actually perform their original mission by assisting the whole of the community or not.
The credit counseling industry has been investigated even by the representatives of the Congress – who claimed that different agencies perform their tasks in different ways with some of them being thoroughly ethical while the others were caught charging excessively large fees and providing their clients with the services of truly poor quality. The report published by the Congress also stated that if all existing credit counseling agencies were subject to NFCC member guideline, the whole industry would go a long way towards the elimination of a large number of abuses detected in some of its parts.
The Fair Share funding model itself served as the target for heavy criticism of the whole credit counseling industry. Most people think it to be a vivid evidence of credit counselors protecting the interests of creditors with much more effort than they protect the interests of their customers. Plus, the credit counseling agencies definitely do not appear to be willing to speak out about the actions of the creditors who fund them - mostly due to the fear of losing what little funding remains. Instead, they deny every little possibility of them being manipulated by the creditors and claim their activity to be totally independent from the influence of either side of a debt negotiation. They also deny that the Fair Share may serve as the evidence of their dependence on the creditors.
Credit counseling is also frequently criticized for the fact that the participation in a Debt Management Plan will definitely ruin a given consumer’s credit history. However, according to the statement announced by the Fair Isaac Corporation (the company that had pioneered the use of credit scores in the financial market), the participation in a Debt Management Plan doesn’t affect a debtor’s credit score at all. However, the participation in such plans gets reported into the credit bureaus at all times anyway, so the client with such history may have certain difficulties when trying to secure a car or home loan and may even be denied any further unsecured credit, such as the one with a credit card. The debtor’s participation in a Debt Management Plan may make some creditors think him/her to be unfit to manage their finances.
One more reason for the criticism of credit counseling agencies is that they tend to understate the future responsibilities of the debtors during the initial enrollment process. There was a number of agencies accused of telling their clients to stop the repayment process and stop responding on collection calls from their creditors, which often resulted in their accounts falling past due in the course of their transition into the DMP. Some debtors resort to the help of credit counseling agencies while their accounts are still current – simply because they want to take the advantage of paying on lower interest rates. Usually it takes DMP’s about 1-2 months to start making disbursements to a given creditor. It’s no doubt that it will be enough for the debtor’s accounts to fall past due because of the cessation of regularly scheduled repayments. However, often such thing just proves to be impossible due to the debtor being unable to pay an advance payment to DMP as well as give the regular monthly payment to the creditor. In this case, the credit accounts will fall past due even if the debtor doesn’t want it or is not aware of it.
It is also known that some agencies employ people right off the street and then train them in credit counseling. Thus, the person whom you entrust with the management of your debt may turn out to be a real rookie in finance with all his/her knowledge basing upon the minimal training that he/she had received prior to being enrolled for this job. Doesn’t inspire too much confidence, does it?
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