Debt Counseling

For many of those in need, debt counseling can be a valuable service.  Debt counselors can help educate consumers about financial matters such as money management or household budgets.  They can also help consumers reduce their debt, as well as avoid bankruptcy or the loss of a home.

History of Debt and Credit Counseling

The first credit counseling agency was created back in 1951, when credit grantors formed the National Foundation for Credit Counseling.  The NFCC was charged with promoting what is termed "financial literacy" in consumers, with the objective of reducing bankruptcies throughout the United States.

By 1993, the Association of Independent Consumer Credit Counseling Agencies or AICCA was created, citing the need to develop standards of ethical conduct among creditor counselors.  The AICCA was the first true competitor to the NFCC, and there was a clear dividing line between the two groups of credit counseling agencies.

While the NFCC believed that face-to-face interactions with the client was an important component of delivering services, the AICCA consisted of counselors which favored delivering of debt management programs over the telephone.

The final organization formed to meet the growing demand for debt counselors was the American Association of Debt Management Organizations or AADMO, which is the largest credit counseling consortium in the world.

How Debt Counselors Help

Debt and / or credit counseling, is a disciplined process by which consumers are taught how to avoid incurring debt they cannot repay.  At times, credit counseling involves negotiating on behalf of clients with creditors in order to establish what is called a debt management plan or DMP.

These DMPs frequently offered clients reduced monthly payments, lower fees, and reasonable interest rates.  These payment arrangements are also within guidelines established by the creditors themselves, so the entire process works well for both the client and creditor.

Free Debt Counseling

One of the reasons credit counseling agencies are able to offer their services for free is because of the compensation agreements these agencies have with creditors.  For example, a credit counseling agency is often compensated by the same creditors to whom the debt payment is made.

This fee is sometimes referred to by the credit industry as "Fair Share," with compensation in the area of 5 to 15% of the debt amounts recovered by the counselor.  It is this fee structure that has led some to believe that credit counselors are acting as an extension of the creditor's collections group.  Some experts also believe that this free service arrangement opens the door to certain abuses.

Debt Counseling versus Debt Repair

Debt counseling is different than debt repair, so the services that good counselors will provide are different than those specializing in debt repair.  In fact, debt repair often involve shady claims that the company can restore credit in just a few short weeks or even days.

Unless there are glaring mistakes on the client's credit history report, this is simply not true.  Restoring credit takes time, and a record of good payment history.  Other practices that go beyond this approach may be illegal.  Fortunately, there are laws that help protect consumers against financial fraud, less-than-honorable debt counseling services, and debt repair companies.

In fact, it is illegal for any agent of the company to misrepresent the organization's services including:

• Making untrue statement to the client's credit reporting agency or creditors.
• Advising consumers to change their identities.
• Accepting payment in advance of fully performing services.

Finding a Good Debt Counseling Service

Now that we have all the warnings out of the way, let's talk about how someone can find a reputable debt counselor.  As mentioned earlier, the National Foundation for Credit Counseling or NFCC is a non profit organization dedicated to the setting of ethical standards for the debt and credit counseling industry.  The NFCC, through its member agencies, has created the oldest and one of the largest counseling networks in America.  Members of this network can be identified by the NFCC member seal.

The NFCC seal also assures the consumer that the agency has met the high standards and ethical practices set forth by the NFCC.  The counselors are certified and are trained to provide consumers with the help they need to realize long term financial strength.  Many of these partner agencies offer free services, or charge nominal fees to cover operating costs.

Solving Debt Problems

Finally, any good debt counselor will have a multifaceted approach to solving debt problems.  Make sure your counselor takes a holistic approach to all of your outstanding debt and credit issues including:

• Referral Services - often debt troubles are the result of underlying family situations that need to be resolved before a financial situation can improve.  A good debt counselor should be able to get their client in touch with other social agencies that can help with these matters.
• Budgeting - many people are able to improve their debt situation simply by learning how to budget their money in a realistic manner.  Usually, the budget can help consumers to reduce their debt before they need to consolidate their bills.
• Debt Management Plans - creating a good debt management plan will help you to not only deal with your existing debt, but also prevent you from getting into debt in the future.
• Debt Consolidation - as a final step, it may be necessary for the debt counseling agency to go beyond budgeting and negotiating with creditors. They may develop a plan to consolidate debt in a way that works for the client.  The focus here will be to consolidate non-secured debt such as credit cards, and leave the client with a financially-responsible loan.

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