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How Does Debt Counseling Work?

The average household in the United States is in debt to the tune of about $14,500, not including mortgage debt. More and more consumers have over-extended themselves financially. Bankruptcy is no longer an option for many people. Sometimes Americans feel backed into a corner when it comes to their finances and credit scores, and many turn to debt counseling for help.

The difference between Debt Counseling and Debt Settlement

If you get help in time, you can actually prevent a bankruptcy or foreclosure

When you hire a debt or credit counselor from a debt or credit counseling company, your goal is to take various steps to reduce the interest you are currently paying and to increase your credit scores. A debt settlement organization works with you and your creditors to reduce your overall debt.

Before you begin to take action on your current financial situation, it would be wise to determine which program best suits your situation.

Before it's too late

The trick is to recognize when you've gotten yourself into trouble and to take measures right away. Anyone who has gone through a bankruptcy or foreclosure will likely tell you how helpful a good debt counseling agency can be. If you get help in time, you can actually prevent a bankruptcy or foreclosure from occurring. Here's what typically occurs when you first go to see a good debt counselor:

After a meeting, during which your finances are carefully gone over in detail, a process that can take up to an hour, a debt counseling agent will determine the best course for your situation. They have several alternatives to offer. They can often persuade your creditors to lower your payments or interest rates. Usually, you write one check a month to the debt counseling agency, and they, in turn, pay your creditors. Usually, debt counseling agencies will charge nothing or very little. They get the majority of their funding from creditors and banks. A schedule is then set up, and, if you do your part, you'll be out of debt, usually in 36-60 months. Along the way, the debt counselor can help you improve and rebuild your credit, set up a reasonable budget and send you to helpful educational workshops so you can avoid future financial problems.

How much debt counseling costs

It pays to do your homework and shop around before choosing a debt counselor. Don't automatically trust a counselor just because they claim they are Christian or non-profit. As stated earlier, a legitimate credit counseling agency should charge you little or nothing. Small fees are becoming more common because many creditors are lowering the amount of money they pay to credit counseling services,

Costs to you should not exceed $50 and should, in fact, be less. It would be wise to not agree to anything more than $20. It depends on what you can afford, and a reputable debt counseling agency uses a sliding scale to help determine this. Fees are voluntary, and if your chosen agency hides that fact from you, you should probably look elsewhere for an agency.

Federal Regulations on debt counseling

Currently there is no regulation on debt counseling businesses. A few states have created their own regulations to protect their citizens.

Though the government has made it law that consumers must visit a credit counselor before declaring bankruptcy, they have earmarked no money or funds to investigate credit counseling agencies. Hopefully, this will change in the near future. Until then, there are two places you can go to find a reputable credit counselor.

Visit the National Foundation for Credit Counseling, or NFCC, at This foundation has worked to help people with financial problems for over fifty years, and they have strict guidelines on membership.

To become accredited by the NFCC, an agency must adhere to the following guidelines:
  • They must be truly non-profit and recognized as such by the IRS.
  • They must have all the proper licenses.
  • They must audit their operating and trust accounts.
  • They must provide reviews of their consumers' income and debts, along with written plans for reducing and eliminating that debt.
  • They must disperse the proper payments to creditors at the proper times, usually twice a month.
  • They must provide their clients with written statements at certain intervals.
  • They must offer various educational programs and other ways to help consumers overcome their debt.
The second reputable organization that strictly accredits counseling agencies is the Association of Independent Consumer Credit Counseling Agencies, or the AICCCA. To be safe, choose an agency fully accredited by one of these foundations.

If an agency is a member of the NFCC or the AICCCA, they are more than likely reputable.

Since it is now mandatory that a person wanting to file for bankruptcy visit a credit counselor before being allowed to do so, there is a real need for regulation and strict laws. Hopefully, these will soon be set into place. In the meantime, buyers ought to beware.

More Information

The Consumer Federation of America has a website filled with helpful advice and information. You can find it at:
Also visit the National Foundation for Credit Counseling, at:
The Association of Independent Consumer Credit Counseling Agencies, or AICCCA, can be found at: can be helpful and informative, as can the Better Business Bureau, whom you should contact if you feel you have been ripped off by a credit counseling agency. Their website is: Along with much helpful information, you can also use the online locator to help you get in touch with your local Better Business Bureau.

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