Credit Counselors: What to Expect, What to Avoid


December 2003

Are you in debt and feel like you can't make any headway? One frequent piece of advice is to consolidate the debt and have a single monthly payment. This may be a good plan, especially if restructuring the debt includes education on budgeting. Credit card companies may give lower interest rates and waive late fees to consumers who accept a plan to repay their debt. The credit card companies realize that failure to get a handle on debt eventually leads to bankruptcy.

There are good credit counselors and bad credit counselors. Some credit consolidators have engaged in charging excessive fees, and some divert money which should be used to repay debt. The Internal Revenue Service and the Federal Trade Commission advise consumers to be wary of the costs charged by credit counseling organizations. The IRS is reviewing the tax-exempt status of some of the organizations. Lawsuits are pending in Illinois and Missouri against AmeriDebt.

Be very careful of companies who suggest consolidating your credit card debt by placing a second mortgage on your home, or refinancing your home. You could lose your home! If a creditor doesn't already have a mortgage on your home, creditors can't get your home. If you give them a mortgage, you give them the power to take your home. Even in bankruptcy, your home is not subject to creditors unless they already have a mortgage. Refinancing or placing a second mortgage on your home is only a good idea if you are sure you can still afford the monthly payment.

You may not be able to pay credit card debt due to unemployment or disability. As a result, you may be judgment proof, which means that creditors may not be able to take any of your property. If that is the case, it may not be a good idea to agree to pay anything if you will not be able to feed your family or keep your home.

How do I find a good credit counselor?
The National Foundation for Credit Counseling has nationwide offices (1-800-388-2227). Another national group is the Association of Independent Consumer Credit Counseling Agencies (1-800-450-1794). Also check with the Better Business Bureau in your area, and the Iowa Attorney General's office of Consumer Protection (515-281-5926).

Once you find a credit counselor, find out what the charge is for initial counseling, and for a repayment plan. Remember that the credit card companies may help you by lowering your rate of interest while you repay them. Usually your account will be closed during this process. You will make one payment to the credit counselor, who will then pay your creditors each month.

Meanwhile, take a look at your bills. Figure out which ones to pay and which can wait. As we head into the winter months, keep the utility bill at the top of the list, and plan for it to be high this winter. After rent, utilities, food, and work-related expenses, any money left over can be applied to your debts. Don't pay on the credit cards before you take care of the essential needs. If you have any questions about your debts, or about the legal rights you have regarding your debts, feel free to call Iowa Legal Aid at 1-800-532-1503.

Last Review and Update: Jan 02, 2008

Contacting the LiveHelp service...