Credit Counseling is not debt consolidation – Credit counseling is a proposal to pay all the outstanding balances in full over a maximum 5-years with a freeze on interest accrual.
What is Credit Counseling?
If your client is behind on paying its unsecured debt, credit counseling agencies can help the client gets back on their feet. Credit counseling is an arrangement to pay your client’s outstanding balances over a maximum 60-months interest-free (some lenders may not lower their interest rate to zero or accept a payment plan).
Credit counseling is the same as debt management. As long as the debtors commit to a debt management plan, Credit counseling agencies offer great support and can teach numerous money management skills. Including, how to establish and follow a budget.
They also offer many insights on how to avoid certain debt pitfalls in the future.
Credit counseling is one option that debtors should seek to avoid bankruptcy. Fifty percent of people who engage credit counseling services complete their plans, the other half, drop out or file for bankruptcy.
If you want to refer your client to a credit counseling agency, I suggest to:
- Use a non-profit credit counseling organization
- Advise your client to avoid paying upfront fees
- Engage ethical and reputable credit counseling agencies
- Avoid agencies that promise to relinquish debt for pennies on the dollar (reputable agencies do not make such promises)
- A word to the wise: remain cautious when choosing a credit management company. The industry has many fly-by-night outfits that can disappear with your money, and damage what remains of your client’s credit.
Credit counseling may not be an option if your client’s debt load is too heavy. Creditors have a limit on the minimum money that they are willing to accept as a settlement on their debt.
Credit counseling company may not be able to help every debtor eliminate its debt.
If this is the case, a Consumer Proposal (Canadian) or Wage Earner Plan/Chapter 13 (USA) may be your client best option.
Using the Money Coaching Software Platform, you can plan and manage your client’s proposal or even bankruptcy.
Let’s explore the advantages and disadvantages of Credit Counseling strategy.
Advantages of Credit Counseling
Credit counseling offers an end to the debtor’s creditors harassment or legal action. If the debtor follows their directions, the debtor will learn new money management tools and skills that will serve them well throughout life.
Disadvantages of Credit Counseling
Creditors will report to the credit bureaus that your client is in credit counseling. This demonstrates an inability to take care of your financial affairs which adversely affects the debtor credit worthiness for a minimum of seven years. Credit Counseling impacts the debtor’s credit negatively.
The result, the debtor, will end up paying all its outstanding debts without interest over a maximum of five years.
Who Pays The Fees Of The Credit Counseling companies?
The lenders themselves pay most credit counseling companies’ fees. They get paid by holding back a certain percent of the debtor payments for their fees.
Some critics complain that the credit counseling industry is just a tool of the lending industry.
How to help your client succeed with their debt management plan?
Leveraging credit counseling as a strategy to deal with your client debt doesn’t solve the problems that create the delinquency in the first place. Your client would benefit greatly from having a debt elimination plan in its life. Your client needs help putting its financial house in order. You can help your client:
- Get to know their current financial reality
- Determine their Net Worth
- Define their life goals and priorities
- Find the cash they never know they have
- Implement a spending plan/budget, fund their life goals and costs of living
- Track actual expenses and measure against estimated expenses to bring further balance to their cash flow
- Commit the savings to funding their Save-Me-From-Debt and 911 funds
The Monthly plan review will keep your client motivate and on track with their debt elimination plan
You can help your client get out and stay out of debt for life. The Money Coaching Software Platform helps you deliver this superior value proposition.