How Do Credit-Counseling Agencies Work?


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.

The relationship between credit-counseling agencies and credit card companies

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.”

Fees charged by credit-counseling agencies

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.

Do your research and get educated about your options
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.