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The Ugly Truth About Credit Counseling

Young couple in financial troubleNo matter how deeply you might be in debt you do have options for managing and eliminating it. Three of the most popular are credit counseling, debt consolidation loans and a chapter 7 bankruptcy. But before you sign up for credit counseling, you should know its unhappy truth.

What is credit counseling?

As you might know, this is where you go to a credit counseling agency and they help you develop a debt management plan (DMP). The best of these are nonprofits and charge little or nothing for their services. In addition to helping you develop a DMP, they will work with your creditors to get your interest rates reduced. If you stay with your DMP, you should be able to get out of debt in about five years.

A sad success rate

Unfortunately, the success rate of debt management plans is about 20% to 26%. In other words, only about one out of every five people who sign up for a DMP actually complete it. In addition, it seems that only people who a have considerable amount of disposable income left over each month are able to get out of debt via a DMP. The National Foundation for Credit Counseling itself reported completion rates of only about 26% with about 20% of people who had signed up for a DMP leaving for self-administration. In other words, they felt they could complete the plan better themselves than through a counseling agency.

Why such a low rate?

There is no single reason why people fail to complete debt management plans. However, it is thought that one of the major reasons is the limited amount of concessions that lenders will offer consumers who choose credit counseling. In other words, if consumers sign up for a DMP and then learn that it can’t significantly lower their debts, they are likely to not complete a 3 to 5-year DMP.

Useful to only some consumers

It is believed that the way DMP’s work today makes them useful for only some consumers. It’s not the debtor but the creditors who call the shots when it comes to concessions. History shows that they will rarely reduce the principal owed as part of a DMP. In fact, consumer credit counseling agencies really have only three important concessions they can offer their customers. They may be able to “re-age” their accounts, get interest rates reduced and get late fees and penalties eliminated or at least reduced.

A DMP requires self-discipline

Another reason why credit counseling has such a low completion rate is because they require a fair amount of self-discipline on the part of people who sign up for a DMP. They will lose their credit cards and be required to not take on any new revolving debt until they complete their plan, which could be five years. Some people simply don’t have enough self-discipline to handle this. They will begin running up more debt, find they can no longer make payments to the credit counseling agency and drop out of the program.

Other options

Both debt consolidation loans and chapter 7 bankruptcies have better completion rates than credit counseling. This is especially true of secured debt consolidation loans. This is likely due to the fact that these loans are often secured by a very important asset such the borrower’s house. A chapter 7 bankruptcy also has a good completion rate because there is no alternative. When you’ve gone through a bankruptcy, you will have discharged most of your unsecured debts and should be able to keep your most important assets, including your house, car, furniture and any tools required in your job.

Debt settlement

Debt settlement has become increasingly popular because unlike credit counseling, it can actually get your unsecured debts reduced. Plus, debt settlement is a way to get debts consolidated because once the settlement company has negotiated settlements with all of your creditors, you will make only one monthly payment. In most cases, debt settlement will help you become debt free in 24 to 48 months – depending on how deeply you are in debt., Honest, ethical debt settlement companies have a much higher success rate than do consumer credit counseling agencies and you can probably now see why.

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