You Asked, We Answered . . .

Q: What happens when you go to a credit counselor?

A: Debt can be a chronic disease or an addiction that can take over your entire life.  It can affect the secretary earning $35,000 a year or the $150,000-a-year executive. According to Consolidate Credit Counseling in Fort Lauderdale, Florida, single women aged 18 to 25 seek help in greater numbers than men of the same age. The wage gap, as well as the amount of money women tend to spend on their career wardrobes, may explain this disparity, says Howard Dvorkin, the president of Consolidated.  Whatever the reasons for your debt, know that you’re not alone and that you can take steps to get it under control.

Some Credit Facts

• More than 1 billion cards are in circulation in the United States. That’s four credit cards for every man, woman, and child.

• The amount of consumer debt has skyrocketed from $21.5 million in 1950 (the year Diner’s Club was introduced) to more than $1 trillion today. The total amount of debt carried on MasterCard and Visa is a mind-boggling $455 billion—up from $350 billion in 1994. 

            As a country, we have been on a spending spree. Through both good and bad times, we’ve learned to live beyond our means, financing today’s dreams with tomorrow’s paycheck. How do you know whether you’re headed for financial trouble?  If even three of the following five statements fit your money profile, it’s time for concern—and action.

1. I frequently end up paying my bills after they are due.

2. I am getting further into debt each month.

3. I have used an advance from one credit card to make the minimum payment on another?

4. I frequently use my credit card for purchases that I previously paid with cash.

5. I find it hard to concentrate at work and have problems at home, because of my spending habits.

So What Are Your Options,

If You Can’t Manage Your Credit Problem Yourself?

             If you want to get out of debt, but you can’t do it on your own, you should consider credit counseling. But be careful where you go for advice. The Consumer Credit Counseling Service (CCCS) is a private, nonprofit organization accredited by the Council on Accreditation of Services for Families and Children.  CCCS has offices throughout the country.

             “The goal of our service is to help people to come up with a plan for managing their debt,” says Steve Bucci of the CCCS of Southern New England. “About two-thirds of the people we see come in for credit counseling only. They need only a little coaching to manage their current situation, and a more organized payment plan may not be required.  Or they might come in for one specific problem, such as a mortgage foreclosure.” 

            As Bucci explains the process, certified consumer credit counselors advise you in managing your money, assist you in establishing a realistic budget so that you can do more with what money you have, and teach you to manage money so that you can handle credit in the future. There is a nominal fee for the service.  Sometimes you just need some assistance to get back on track. A solution might be right in front of your eyes, but you just can’t see it. The counselor will go over your income and expenses with a fine-toothed comb and help you prioritize and recommend solutions. 

            About one-third of the people who seek help from credit counselors need more help. They need a debt-management plan.  CCCS works with each of these clients to come up with a debt-repayment schedule that the client can live with. They negotiate with their clients’ creditors on their behalf.  “We work with creditors to get lower monthly payments,” continues  Bucci. “We usually get them to reduce finance charges and suspend late-payments fees.”

            However, entering into a debt-management plan does not guarantee that your interest rates will automatically be lowered.  Each creditor has different rules.  One may cut your interest rate in half, another may increase your rate, and still another may leave your rate unchanged.

What You Need to Know About Debt-Management Plans

            Once your creditors agree to your repayment plan, you’ll hand over a certain amount of money each month to your local CCCS office, which will, in turn, distribute these funds to your creditors. The amount paid to each creditor is usually in proportion to the debt owed to each.  For example, if you send CCCS $500 per month and your MasterCard bill represents 20 percent of your total debt, then $100 will go to MasterCard. All of your monthly check to CCCS is used to repay creditors.

            The average fee for this service is $11 a month (based on your ability to pay), but CCCS will waive it if necessary.  CCCS also asks your creditors to donate some of the money they receive. Some do and others don’t, but says Mr. Bucci, “we work with all creditors, whether they contribute to us or not.  We do not have a contract with the creditors.  Our responsibility is to our clients.”

            Sounds great, but there is one very important caveat—and any reputable credit- counseling group you go to should warn you of this fact: your credit report could be affected. Although the counseling agencies don’t report to the credit bureaus that you've enrolled in their program, some of your creditors might.  When your creditors see that you have applied for whatever special terms they may offer to those in a credit-counseling program, they can ask the credit bureaus to add a note to your credit file. Once that happens, it will be difficult to get further credit until your debt is cleared and you have proven that you can manage credit responsibly. Your creditors will most likely also immediately freeze or close your accounts so that you can’t make further charges.

            Of course, your credit history is probably already in shambles if you have been paying late or sporadically, and once the debt-management plan is in place, you’ll slowly begin to build up your credit score again. Since credit history, or length of time that you have held a credit card, plays a large part in determining your credit score, if you can maintain one active card while you go through this process, you should. Charge only a limited amount on it, and pay off the balance each month; that way you won’t have to start from scratch, building up a credit record once you’re solvent again.

What You Need to Know About Debt Settlement

            In some extreme cases, a creditor will agree to debt settlement. In this situation, the creditor will write off the debt as uncollectible or reduce the amount owned.  This is one of the most damaging notations to have listed on your credit report. Also, the amount forgiven is often (though not always) considered taxable income by the IRS and the bank forgiving the loan sends a 1099 form reflecting the amount at the end of the year. For instance, if you owe $1,000 and the creditor agrees to settle for $500, the IRS considers the other $500 as taxable income

            While it is possible to put together a debt-management plan and renegotiate your interest rates with your creditors on your own, going it alone is not as easy as it seems.  It can be very emotional.  Your creditors are usually not interested in how you got into this mess. A credit-counseling service acts as a buffer between you and the creditor and isn’t judgmental.

            One final word of caution: There are plenty of scams on the Net and elsewhere.  Make sure that you use a certified credit-counseling agency.  The yellow pages of your telephone book will list local numbers, or you can use the following Web sites, www.debtadvice.org, www.nfcc.org, and www.cccs.org, to locate a reputable counseling service.

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Financial planner Elizabeth Lewin contributed this answer. She is the co-author of the recently published book “Family Finance” (Dearborn Trade).  She is also the author of “Your Personal Financial Fitness Program,”  “Financial Fitness for Living Together,” and “Kiss the Rat Race Good-bye.”  Elizabeth writes frequently for various magazines, has appeared on numerous national radio and television talk shows, and is on the Editorial Board of MAKING BREAD Magazine.

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