Debt Counselors: Pro's and Con's.
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Consumers contact debt counselors when they need help in creating a viable budget and a plan to maintain it, working out a repayment plan with creditors, or simply keeping track of mounting bills. In fact, the law now requires all persons to see government-approved debt counselors within 6 months before filing for bankruptcy and eventually receiving bankruptcy relief.
Debt counselors and the organizations that employ them are non-profit and will work with consumers towards the ends of solving his or her financial problems. However, consumers need to be aware that not all debt counselors and the organizations through which they gain employment are non-profit, despite claims to be so. The services of such debt counselors may be advertised as free, affordable, or even legitimate. But then these unethical debt counselors charge high "hidden" fees or urge consumers to make "voluntary contributions" that create even more debt. Worse, consumers then do not receive the counseling they need.
Many debt counselors offer services through local offices, the Internet, on the telephone, or in-person. Universities, military bases, credit unions, housing authorities, and branches of the U.S. Cooperative Extension Service also employ nonprofit debt counselors. The majority of these debt counselors are professional and do not engage in either unethical or illegal abuses of their position.
Reputable debt counselors will be able to discuss with consumers debt and money management and budget development as well as offer free educational materials and workshops. Such debt counselors will be certified, trained, and knowledgeable in the areas of consumer credit, money and debt management, and budgeting. Typically, debt counselors discuss a consumer's entire financial situation with him or her and develop a personalized plan to solve monetary problems. In most instances, the initial counseling session lasts an hour and then follow-up sessions are offered.
Debt counselors may suggest to a consumer that he or she enroll in a debt management plan, sometimes referred to as a DMP for short. A debt management plan all by itself is not considered debt counseling, though it can be utilized in conjunction with Fair debt counseling options. However, while the option may present itself, a consumer should not enroll in a debt management plan unless a debt counselor has already thoroughly reviewed his or her financial situation and offered customized money management advice.
In a debt management plan, consumers make monthly money deposits with the debt counselors' organization, which then uses these deposits to pay the consumers' unsecured debts (such as credit card bills, student loans, and medical bills). The debt counselors will have already worked out a payment plan with both the consumer and the creditors.
Successful debt management plans could possibly take up to 40 months or even longer to complete with the consumer's scheduled monthly payments. In addition, consumers may have to agree not to apply or use any additional credit while participating in the debt management plan. After all, they do not want to add more to their debt, especially when they are now trying to pay it off.
Another option debt counselors might suggest for consumers is lowering his or her cost of credit via the consolidation of his or her debts through a second mortgage or a home equity line of credit. It should be noted, however, that such a loan does require a consumer putting up his or her home as collateral. Consumers interested in this option should be aware that if he or she cannot make the payments or if the payments are late, the possibility exists that he or she will lose their home.