Credit counseling

The most popular debt management option is credit counseling ("consumer credit counseling"). Applying this debt consolidation approach, a credit counselor will set you up in a debt management plan ("DMP"). The aim of the plan is to consolidate your high interest debts into a combined monthly payment based on a reduction of the debt interest rate. In turn, you will remit a payment to the credit counselor, who will distribute the interest-reduced payments to each creditor. Additionally, your enrolled credit accounts must be closed and the open accounts must be restricted for future charges.

The credit counseling approach is probably not a good option if you suffered a major loss of income and have excessive high-interest debt. According to a Consumer Reports survey, credit counseling debt management plans have a 21% completion rate. A reason addressed is their unbearable monthly payments, which generally compare to or are greater than the minimum payments that a debtor previously struggling to make. Possibly the top reason for their low completion rate is the mere interest rate reduction, which is often ineffective for a consumer with a major financial challenge.

Some critics have argued that credit counselors are debt collectors primarily serving the interests of creditors and not consumers. Most of their compensation comes from creditors that participate in debt management plans. Each year, credit counselors collect approximately $5 BILLION from consumers on behalf of creditors that pay them a fee known as "fair share." The fee ranges between 7-15% for every dollar collected from a consumer by a credit counselor.

Although the "enrollment" in a debt management plan has no effect on an actual credit score, it is generally "negatively" reported to the credit bureaus. The credit report credit item may indicate a consumer participates in a "Debt Management Hardship Plan." Because of this red flag, many lenders suspect that a consumer is unfit to manage his finances. As a result, consumers are oftentimes denied credit. Additionally, some creditors, such as American Express, do not participate in debt management plans. The plans also do not accept business debt.

Note: 2 out of 10 people complete a DMP and the graduates spend 4 to 6 years paying back 1½ to 3 times their original debts. You can also be cancelled from a debt management plan if you miss a monthly payment, which would reset your debts to their original interest rates and leave you unprotected from creditors.

To learn more about the Deb-to-Freedom Plan, please call 1-800-213-9968 or complete our online form.