Credit counseling helps people to solve their debt problems and avoid filing for bankruptcy by offering various suitable options before them.
Credit counseling: an introduction
Credit counseling, called debt counseling in the United Kingdom, is a process that helps people to avoid or get out of debt with the help of various types of debt management services and solutions. Credit counseling teaches the debtor about credit,
budgeting, and financial management. It has gained additional importance with the new bankruptcy law making credit counseling compulsory for a debtor before he/she files for bankruptcy.
In recent times, credit counseling agencies have mushroomed all over the United States as more and more people are failing to repay their debt.
Intermediary between debtors and lenders
Credit counseling is usually part of a
debt management plan advised for debtors who are facing difficulties in repaying their debts. In order to help the debtor, credit counseling agencies mediate between the debtor and the lenders. They negotiate on the debtor’s behalf to reduce interest, do away with late payment fees, cut down monthly payments,
negotiate debt repayment plans etc. Lenders are not averse to it because they do not want the debtor to file for bankruptcy. Because, unsecured creditors in most cases stand to lose all the money if the debtor files Chapter 7 Liquidation Bankruptcy.
In many cases, credit counseling services collect one consolidated payment from the debtor and disburse it proportionally to the creditors each month. Credit counseling and debt management agencies often ask creditors to stop collection activity so that debtors can make the minimum monthly payments on time. If you make regular monthly payments to the credit counseling agency for a considerable length of time, it will be in a position to negotiate with your creditors to get your accounts updated to current on your credit file. It gives your credit rating a fresh start via the re-aging process. This will keep your credit file in decent standing while you repay your debt.
How to choose a credit counseling agency
You should be careful while choosing a credit counseling agency. There are a few unscrupulous agencies who might take you for a ride. So look for an agency that is experienced with a good track recode. Limit your choice to only those that have counselors adhering to AICCCA standards, are preferably non-profit, charge an affordable amount of fees.
Credit counseling agencies as a whole sometimes draw criticism because of unethical behavior by a few of them, or due to the fees they charge. Some even doubt the merits of this tool as participation in a debt management plan may adversely affect a debtor’s credit ratings. But, all in all, credit counseling is a useful tool that helps people to get out of debt.