Debt financial counseling is another option besides bankruptcy for financial recovery. You can also consult a debt or credit counseling service for help managing your debts. Obtaining debt financial counseling from a credit counselor can help you pay off your debts while avoiding the negative impacts of bankruptcy, which affects your ability to obtain new credit (or qualify for good interest rates) for several years. In this article, we will delve into debt financial counseling and help you determine if it is a potential solution to get out of debt.
What is Debt Financial Counseling?
Debt financial counseling, also known as “credit counseling,” is offered by trained counselors who can help you create a budget, review your credit report and scores, and even develop a debt management plan to pay off your debts over time.
Note: You can find reputable debt counselors through nonprofit agencies such as the National Foundation for Credit Counseling (800-388-2227) and the Financial Counseling Association of America (800-450-1794).
How Does Debt Financial Counseling Work?
Debt financial counseling services match you with a credit counselor who can provide a personalized action plan to address your financial challenges and help you achieve your goals. After the consultation, you can choose to have the credit counselor assist you in setting up a repayment agreement with your creditors under a Debt Management Plan (DMP). You will make one payment to the debt financial counseling agency, which will then pay your creditors on your behalf.
Note: The debt counselor may be able to negotiate a lower interest rate or reduce or eliminate your finance charges.
While your participation in a debt management plan may be reported on your credit report, the program itself should not negatively impact your credit score. However, you may need to close credit accounts as part of your debt management plan; in this case, your credit utilization rate may be affected. A higher credit utilization rate may impact your credit score. However, your credit score may improve once the accounts are back in good standing and you continue to make timely payments.
The Difference Between Debt Management and Debt Settlement
It is important to note that a debt management plan is different from debt settlement. Nonprofit organizations offer debt management plans that aim to help you pay off all your current debts. For-profit companies offer debt settlement, which negotiates with your creditors to accept a lower amount than you owe in exchange for forgiving the remaining debt.
If the debt settlement company is successful in its negotiations, you will owe them fees, and you may face income taxes on any amounts forgiven by your creditors. Debt settlement is also likely to negatively affect your credit score.
Note: You may not be allowed to open any new credit cards while enrolled in a debt management plan. Additionally, any credit cards secured by your debt management plan may be closed. Using your credit card can lead to the termination of your debt management plan.
When Should You Consider Debt Financial Counseling?
If you are struggling to pay off your debts, you may want to consider debt financial counseling, even if you are currently behind on your balance. Even if you do not enroll in a debt management plan, a credit counselor can help you create a budget and provide advice on managing your debts. Here are some additional things that can help you determine if debt financial counseling is right for you:
- Do you need professional advice?
- Do you have a lot of unsecured debt?
- Are you…
- Are you behind on payments?
- Do you want to consolidate or reduce your monthly payments?
Finding a Credit Counselor
Nonprofit organizations offer debt counseling services, including credit unions, universities, and government housing agencies. It is important to check the qualifications of any credit counselor you are considering. Online reviews, such as those provided by the Better Business Bureau, can help you evaluate debt counseling agencies before making a decision.
Note: The American Trustee Program maintains a list of financial counseling services that offer counseling before filing for bankruptcy.
Alternatives to Debt Financial Counseling
There are other methods for managing debt besides using a debt financial counseling service.
- Take a class: If you don’t feel comfortable consulting with a credit counselor, sign up for a class that provides information on how to manage debt. Look for a class at a local community college or university, or online.
- Do it yourself: You may be able to use some strategies to pay off debt on your own. Start by creating a budget so you know where your money goes each month. Once you know how much extra you have in your budget, you can create a plan to pay off your balances. You may also be able to negotiate lower interest rates by contacting your creditors directly and asking for them.
- Start a group: You can create a debt management group and recruit members who have money or debt management issues so you can provide support for each other. The group approach adds accountability to your budget and lets you talk about your concerns and frustrations with others who are going through the same situation.
Conclusion
Debt financial counseling can provide you with the professional guidance you need to manage debt without filing for bankruptcy. It is especially helpful for those who feel overwhelmed by the number or size of debts. If you decide to seek a debt financial counseling service, look for a reputable credit counselor who can truly help you improve your financial situation.
There are many other options to consider instead of a debt financial counseling service, from financial advisors to managing money on your own. The right debt management strategy for you is one that takes into account your financial picture and your willingness to seek help from others.
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Sources:
The Balance only uses high-quality sources, including peer-reviewed studies, to support the facts in our articles. Read our editorial process to learn more about how we fact-check and maintain the accuracy, reliability, and quality of our content.
Federal Trade Commission. “Dealing with Debt.”
National Foundation for Credit Counseling. “Debt Help.”
Debt Solutions. “What types of debt can a debt management plan help with?”
National Association of Credit Counselors. “Debt Management Plans.”
Source: https://www.thebalancemoney.com/when-should-i-seek-debt-counseling-2385863
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