Need Debt Relief? Credit Counseling Versus Debt Repayment Programs

Struggling to make your payments?  Is it the luck of the draw of who is getting paid next? Finding yourself in a situation when your payments exceed your income can be both frightening and frustrating.  It is important to know the differences between these programs and the long term impact that it can have on your credit.  Stress created by calls from collections departments, arguments with your spouse over what bills should be paid first,  and your families basic needs not being met, can destroy a family.  There are some basic rules to follow to begin to relieve some of the stress comes with financial problems.  We will cover these briefly and offer insight regarding the difference between credit counseling and debt repayment programs.  

1. Be honest with yourself and your spouse.  Promise each other that you will remain calm and rational then sit down and list EVERY bill that is owed, note the status and the amount past due.  

2. Categorize the debt by order of importance.  List your debt that affects your basic needs first.  Housing, transportation, and utilities would be my primary concerns.  Follow those with anything that is at risk of repossession or being sent to collections.  Then anything left can follow.  

3. Get through the toughest day of your life.  Once the debt is categorized and you fully understand where each account is in the repayment process, now it is time to make the calls.  Contact each creditor, be honest with your situation and arrange an acceptable payment plan if possible. Companies lose millions of dollars a year to bad debt write offs.  If they have any business sense, they will do whatever it takes to help you settle the balances.

4. Assess your situation once all calls have been made.  Are you still in a position where you cannot meet all of your obligations?  Hopefully not but if you are, read on.

There is a huge difference between credit counseling programs and debt repayment programs.  Fees vary and the impact on your credit differs greatly.  Both are run by “for profit” and non-profit organizations.  Don’t fool yourself though, they both incur expenses to do business and a majority of the cost is covered by fees associated with their services.  Some companies receive percentage “Kick-backs” on balances that they “help” you settle.

Credit counseling are programs designed to assess your debt situation much in the way you did earlier.  After assessing your bills and income, they will provide insights on the best avenues for repayment and may even set up a schedule of payments for you.  You are not contracted with these organizations and because of that, you are completely responsible for the repayment of your debt and managing the creditors calls.  On a positive note, unlike most debt repayment programs, working with a credit counselor does not impact your credit score or credit report.  Their goal is to work through you to help you re-shape your budget in order to eliminate debt, provide relief from the stress being caused and hopefully help you develop good spending happens so that you no longer are at risk for developing bad debt.  I can not stress enough the importance of ensuring the organization you are considering is reputable and offers clear explanation of how they will protect your personal information.

Debt repayment programs are a completely different avenue for debt relief.  The services offered range from credit management advice to a complete take over of your debt management.  You will likely be required to sign a contract with the organization, allowing them to negotiate on your behalf over interest, balances, and payment schedules.  In return, the company may assess fees that are charged monthly, generally included in your payment and possibly in addition, percentage fees for the negotiations.  Fees vary and I caution that you fully understand all fees that can be assessed.  I pride myself in being unbiased with the information that I bring to you, but a debt repayment program would be one of the last avenues that I would advise if you are seeking debt relief.  Creditors can and will report to the credit bureaus that you have entered into a debt repayment program.  This information gives the perception that you are no longer able or willing to meet your obligations and can stay on your report for up to 7 years.  The only longer standing hit to your credit with public information is a bankruptcy which will haunt you for up to 10 years.  

Depending on your circumstances, each type of program can provide a level of relief in dealing with the debt.  Debt repayment programs are professionals in negotiation, often reaching an agreement with your creditors regarding the amount you owe, interest, and repayment terms.  These programs have the potential of reducing your debt at a greater rate than other counseling programs, but you must weigh the damaging effects that it will have on your credit.  I advise that you make every effort to manage your debt and repayment on your own.  There are many resources available to educate yourself on the best ways to tackle the concerns.  There is nothing wrong with seeking help when you need it.  I would rather see the money spent on fees be applied toward your debt.  

Remember that committing to making changes in your spending habits is a great step toward improving your financial health and finding relief from the debt.  Budgeting, spending control, and not procrastinating are all ingredients to the success you deserve.  Start today.