Credit-Counseling Agencies
Credit-counseling agencies work with your creditors to lower the interest
rate you pay on your unsecured debt. For their services, you pay the agency a
monthly fee. While they may succeed in lowering your monthly payment, they do
not lower the amount owed, nor do they stop the principal of your debt from
increasing. Thus, the process may help you avoid bankruptcy for a while but your
credit will be severely impacted while you are in the program. Completing the
process takes years and many debtors never see it through completion.
Many credit-counseling agencies derive significant revenue from the credit card
companies. The agencies make the majority of their income collecting fees from
creditors on whatever their clients repay. For this reason, some credit
counseling agencies have been accused of keeping their clients paying their
creditors in a consolidation plan rather than filing for bankruptcy, even if a
fresh start is in the debtors’ best interests. The monthly fees can be quite
high, often as much as 10% or more of the payment. Of course, some agencies take
the entire first payment as a “voluntary contribution.”
The fees charged by agencies might be acceptable if the results delivered were
actually beneficial. However, you must carefully evaluate a credit-counseling
plan, before joining, to make sure that it will actually improve your financial
situation. Some agencies have demonstrably neglected to make timely payments, or
even pay at all, and many have failed to make deals with all the creditors. Not
all agencies are at fault, but given the stakes involved, you should carefully
investigate an agency before joining its program.
The label of a “non-profit” organization may cause some debtors to have the
misconception that the agencies are not charging any fees for their services. In
fact, the executives of these agencies can make hundreds of thousands of dollars
and still retain their non-profit status because they operate in the public
interest. Some agencies derive substantial revenue by referring potential
clients into deals with other companies who sell other products and services.
Credit-counseling agencies usually won’t consolidate debts that would not be
dischargeable in a bankruptcy anyway, such as child support, student loans, and
IRS debt. Instead, they allocate your money to paying debts that would be
dischargeable in bankruptcy, and do not provide relief from the debts that
cannot be eliminated. Even the best credit-counseling agencies usually aren’t
able to obtain the extensive relief from all of your debts provided by Chapter
13. A Chapter 13 bankruptcy plan includes all types of debt, even debts that are
non-dischargeable in a Chapter 7.
The only way to make sure that you are using the solution that is most fitting
for you is to get educated about your options. Speaking with an attorney, who
has an ethical and legal responsibility to give you unbiased and useful
guidance, is a great start to making this difficult decision. The attorney can
help you decide if you can afford a debt consolidation program and if it is
ultimately in your best interests. Please feel free to contact our attorneys
about your options at (503) 352-3690 or fill out our
free evaluation form.
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