Can a Consumer Credit Counseling Service Really Help?

Debt Management Credit Counseling Services: The Truth

Now that you’ve made it this far in the process, it’s time to consider what your options might be to straighten out your finances and keep you out of bankruptcy.

Debt Management Programs and Credit Counseling

As discussed before, a debt management program is set up so that you pay the consumer credit counseling service a single lump sum, and they divvy it up among your creditors.  It saves you the trouble of juggling a dozen different bills and due dates by totaling it into one payment (out of which the debt management credit counseling folks take a cut).  

The downside of this is that debt management credit counseling programs typically have a high dropout rate, and may take quite a long time to discharge the debt completely and wipe the slate clean.  People generally get into trouble with credit cards and other debt because they can’t handle money with any sort of real discipline; there’s a good chance they won’t be able to keep up on a debt management payment, either.  

Debt management credit counseling programs also ding your credit rating.  It doesn’t seem fair, since you’re making a sincere effort to settle the debt, but it’s the way the system works.

Debt Settlement Programs and Credit Counseling

Once again, in a debt settlement program, the consumer credit counselors negotiate with your creditors (credit card, collectors, medical billing, etc) to bargain down the amount owed, the principal and interest and to extend the payment schedule.  This is a bigger step than signing up for a debt management program, and it can have bigger consequences down the line.  

Your credit will take a worse beating in a debt settlement program, and the creditors are not necessarily obligated to go along with it.  What’s more, in many states the creditors can still sue for the amount over-and-above what was agreed to.  In some cases, that bargained-down amount can also be considered “income” and you may have a tax liability for it.

Debt Consolidation Loans and Credit Counseling

Of all the tools available for paying down debt through a consumer credit counseling service, a debt consolidation loan might be the best.  Again, though, it’s not without its risks, double-binds and  Catch-22’s.  In a debt consolidation loan scheme, you would take out a loan to pay off all balances in one go and have a clean slate again.  

The catch is that if you’re far enough behind on everything that you’d consider a debt consolidation loan to start with, chances are your credit score is in rough shape and you won’t be considered very loan-worthy.

A bank will generally want real collateral for a debt consolidation loan, and if you’re a homeowner, that’s probably going to mean your house, effectively making the debt consolidation loan into a second mortgage or home equity loan.  That’s all well and good unless you’ve taken a hit on home value and don’t have enough equity left over to manage such a loan.  Also, if things get worse from there and you can’t keep up on payments, you run the risk of foreclosure and losing your home.

These are all options that a consumer credit counseling service will probably discuss to keep you out of foreclosure, but bear in mind that each of them carries risks.