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 For many of those in need, debt counseling can be a valuable service in helping them to get them back on the right track. Debt counselors can help educate consumers about financial matters such as money management or budgeting. They can also help consumers to reduce debt and assist their clients in avoiding things like bankruptcy or even the loss of one's home.
History of Debt and Credit Counseling
The first credit counseling agency was created back in 1951 when credit grantors created 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 Associated of Independent Consumer Credit Counseling Agencies or AICCA was formed, 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 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 simply 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 agencies 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 - 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. And some also believe that this free services 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 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've got all that scary stuff behind us, 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. Make sure your counselor takes a holistic approach to all of your debt and credit problems including:
- Referral Services - often debt problems are the result of underlying family situations that need to be resolved before a financial situation can improve. The debt counselor should be able to get their clients in touch with other social agencies that can help with these matters.
- Budgeting - many people are able to improve their debt situation simply by teaching them how to budget their money in a realistic manner. Usually, the budget can help consumers to start to dig out from under 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 problems 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 and offer clients a chance 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 get the client back on their feet with a more manageable loan.
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