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Credit counseling has become an increasingly popular alternative to the legal procedure known as bankruptcy. As federal guidelines for filing bankruptcy continue to tighten, more and more credit counseling services are setting up shop to help consumers manage their debts and fend off aggressive collection agencies. These agencies are designed to be non-profit, which means the majority of a client's payments must be earmarked for debt repayment. Credit counseling organizations can legally collect a small fee for administrative costs, but cannot profit from collection fees or interest charges.
In a typical credit counseling situation, an individual may find that his or her financial obligations are not being met with income alone. He or she may only be making minimal payments on credit card balances and falling behind on other debts. Some of their creditors may have already started collection proceedings or other legal action. Declaring bankruptcy in an effort to reorganize his or her debts may seem like the only possible solution. But bankruptcy proceedings stay on a person's credit record for at least seven to ten years. Lawyers who specialize in bankruptcy filings are entitled to a fee for their legal advice. Federal judges assess the debtor's ability to pay and may require a substantial amount of monthly income be held by a trustee.
This is where a non-profit credit counseling service could provide a better alternative. A debtor can bring all pertinent documentation of his or her outstanding debts to a trained credit counselor. This advisor often works as a liaison between the credit card companies and their customers. Once the credit counselor has added all of the outstanding balances and monthly payment obligations together, he or she will calculate a single payment to the credit counseling service which will address all of the creditors. Quite often the creditors are willing to accept these repayment terms in order to avoid the expense and questionable results of traditional collection methods.
Credit counseling does have some negative aspects, however. Credit cards may have to be completely surrendered in exchange for lenient repayment terms. The use of a credit counseling service may be just as damaging to a consumer's credit rating as a Chapter 13 bankruptcy filing. Some unscrupulous agencies are actually non-profit extensions of 'for profit' enterprises. The monies collected by the non-profit entity may be funneled into the 'for profit' accounts and not the actual debts. Anyone seeking credit counseling advice should check out the agency's Better Business Bureau file and ask the advisor direct questions during the initial consultation.