Is debt management or credit counseling the answer to bankruptcy?

  What is the alternative to bankruptcy?

 Changes in the bankruptcy laws, which became effective in October 2005, have removed the easiest alternative that many consumers had turned to in the past for debt relief. This was to file chapter 7 bankruptcies. So how can you keep your wits, pay those bills and still maintain a reasonable standard of living?

 Is debt management/ credit counseling, debt negotiation or credit repair the answer?

 There are several names that are touted as debt resolution agencies. For example, debt management, debt negotiation, credit repair and others. Many of these agencies operate as non-profit. However, there are vast differences among them.

 Debt Management/Credit Counseling Program  

These are non-profit agencies that operate under guidelines from credit card companies. 

They charge low cost fees (under $100.00 for enrollment and under $30.00 for monthly maintenance) to assist consumers to develop a plan of repayment, between themselves and their creditors. In addition, some agencies provide guidance to consumers while they are enrolled, such as budgeting and savings plans. 

Some consumers are reluctant to enroll in these programs, because credit counseling and debt management agencies have developed an ugly reputation because of the bad apples that entered the field to make profit and defraud consumers. However, in reality these programs can be extremely beneficial to consumers who are struggling to keep up with high payments. Another reason consumers have given for not enrolling in these programs is that they damage their credit and lower their credit score. This is a myth because usually, the credit is already damaged and the score lowered if the consumer is paying late fees, double their initial interest rate and some times over limit fees. At this point, credit counseling or debt management can only improve the situation. 

Although there are many who give thumbs down to this solution, it is a feasible alternative to paying the high interest rates, late fees and over limit fees, which kick in if consumers are late or over their limits on their credit cards. 

In an article from the Department of Justice/Trustee Program web site, debt management programs are not for everyone. Therefore, consumers should sign on only after a certified credit counselor, has spent time reviewing their financial situation and has offered advice on managing money. A reputable credit counseling or debt management agency will help to create a budget, and teach basic money management skills to consumers who enroll. 

Debt Negotiation Program  

Debt negotiation is not the same as debt management and credit counseling, although they can describe themselves as non-profit. According to an article posted on the Fair Trade Commission's web site, debt negotiation programs "can be risky and have a long term negative impact on your credit report and, in turn, your ability to get credit". 

These agencies claim that they can reduce your debts from "10 to 50 percent of the balance owed." There is no guarantee that the creditors will accept partial payments and consumers must still pay the remaining balance or risk being sued by their creditors to collect. If the creditors win they "have the right to garnish your wages or put a lien on your home." 

"Finally the Internal Revenue Service may consider any amount of forgiven debt to be taxable income."  Therefore, before consumers pay to negotiate their debts down, they should consider other alternatives such as debt management or credit counseling that encourage paying the debts in full. 

Credit Repair 

jost credit repair companies are able to remove negatives from your credit report. However, if the debts are not paid and the holders updated their reports to the credit bureau frequently, the next report re-enters the same debt on your credit reports. This can become an expensive process, because depending on how frequent the holders of the debts report to the bureau you could be paying to remove the same entry monthly or quarterly.

Contact the Fair Trade Commission for information to help consumers spot, stop and avoid deceptive agencies. 877-382-4357

Verona F. Myrie

Amalgamated Credit Counselors

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