Credit counseling is the preferred alternative to filing for bankruptcy. It is essentially a process of educating the consumer on methods of avoiding incurring debt he unable to repay. Consumers in financial distress who expect to file for bankruptcy are required to prove that they have received credit counseling in an effort to get a handle on their debt prior to the bankruptcy filing during the 180 day period preceding the bankruptcy filing. Reputable credit consolidation counseling agencies will often be members of the National Foundation for Credit Counseling (NFCC) and the member agency is often referred to as a Consumer Credit Counseling Service.
During the initial credit consolidation counseling session, all of the consumer's financial information, including credit card debt, is evaluated to obtain an accurate understanding and assessment his financial situation. Credit counselors would then analyze the consumer's financial information and devise a reasonable budgeting plan with the hope of creating a financial framework that will provide for the consumer's essential living expenses while beginning to manage the repayment of his debt. The consumer is then taught how to track his spending, save money for emergencies, and pay down his existing debts.
In some cases credit counselors will advise the consumer to participate in a Debt Management Program. Once the consumer joins a program the credit counselor will attempt credit card debt negotiation with the consumer's unsecured creditors such as credit card companies, retailers and credit unions to negotiate special considerations for the consumer such as lowering existing payments, reducing interest rates, and waiving fees. The creditor will then close the consumer's accounts and restrict the accounts to future changes only status. The consumer would then make one monthly payment to the credit counselor who would then re-distribute the consumer's payment funds to each of his creditors. Credit card banks will usually accept a lower monthly payment from a customer in a Debt Management Program and sometimes a reduction of up to 50% is arranged although 10-20% is more common. There will also be a reduction in the existing interest rate currently charged by the creditor. Consumers in a Debt Reduction Program can reduce interest rates to 5-10% and in some cases eliminate interest charges entirely which allows consumers to pay off the debt in significantly shorter periods of time.
Credit counseling agencies offer consumers a credit card debt negotiation process called, "reaging" or "curing" an account. Reaging is done by making a series of on-time payments through the Debt Management Program as a show of good faith and commitment to completion of the program. A past due account would be "reaged" into a current account after three consecutive, on time payments made through the program, a new monthly payment would be negotiated by the credit counselor and the account would be reported to the credit bureaus as current. It provides a fresh start for the consumer and a chance to build a positive credit history.
Sounds like a attractive fix for financial woes, but wait, not so fast. It seems that the Federal Trade Commission (FTC) has filed multiple lawsuits against several credit card counseling agencies and openly urges caution in choosing a credit card counseling agency. They have received over 8,000 complaints from consumers concerning credit counselors, hidden agency fees and an inability to refuse participation in "voluntary" contributions.
In addition, the Better Business Bureau reports high complaint levels against credit counselors and credit card counseling agencies. Consulting with a debt settlement attorney about your financial dilemma first is going to be the safest bet every time.