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Liz Pulliam Weston

The Basics

Why credit counseling often fails

Could a debt-management plan get your finances back on track? It works for some. But if you're struggling, it shouldn't be the only option you consider.

By Liz Pulliam Weston
MSN Money

When people are overwhelmed by debt but don't want to file for bankruptcy, I typically recommend they make two appointments:

  • Another with a bankruptcy attorney.

>Should you consider bankruptcy?

Should you consider bankruptcy?

I make the second suggestion for a number of reasons.

One is that credit counselors and their debt-management plans, which are designed to pay off credit card debt over five years or so, are geared to steer people away from bankruptcy. Consulting with a bankruptcy attorney can help ensure that those struggling with debt know all their options.

The other, even more important reason: I know that even if you desperately want credit counseling to work, it often won't.

Here are the statistics, straight from the NFCC. Of the 3.2 million people who contacted NFCC agencies for help last year:

  • About one-third were able to handle their finances on their own after a counseling session.
  • Another third were either too far gone for debt management plans to help, with too little income or too much debt, or had problems credit counseling couldn't help and were referred to social services agencies because of issues such as a gambling problem, alcoholism or other addiction.
  • The final third enrolled in debt-management programs (DMPs), but the dropout rate averages at least 45%.

NFCC spokeswoman Gail Cunningham said 55% of those in DMPs either complete their payments or contact their agency at some point to say they're able to resume payments on their own. Cunningham said she couldn't give me a breakdown of that 55%, so we don't know precisely how many people actually follow through in paying off their bills.

When budget and reality collide

I don't bring this up to discourage anyone from contacting a legitimate credit counselor. Some people do complete their plans, and many others get much-needed advice on budgeting, credit improvement and other topics.

Credit counselors also are a key source of housing counseling; HUD-approved housing counselors help ready people to buy their first homes and advise them on navigating the mortgage refinancing and modification maze when their payments aren't affordable.

Don't confuse debt management plans with debt consolidation, where borrowers are offered one big loan to pay off their smaller debts, or debt settlement, where private companies offer to negotiate a lump-sum settlement, usually for a big upfront fee. Debt-management plans set up low-interest repayment plans so borrowers can pay off credit card debt over time.

But I want people to know that if they're counting on debt-management plans as a way to avoid bankruptcy, the deck might be stacked against them. They need to consider all their options before signing up for a debt-management plan or any other debt solution.

Roni, who lives near Seattle, wishes she had.

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Dealing with debt: Debt settlement © Money Talks News
Dealing with debt: Debt settlement
Maybe you've seen the ads about going to a debt-settlement company and getting your debts cut in half. Is that for real?

She signed up with a credit counselor and started shoveling money toward her credit card bills. Then collectors started calling about other debts she owed, and Roni realized she couldn't keep up.

"At the time, the (credit) counselor made the comment that she wondered how long it would be before I filed for (bankruptcy) protection because my debt payment was such a large percentage of my income," Roni said. "I was young and didn't know all of my options and would have saved myself a lot of time and stress if I had filed Chapter 13 sooner."

Chapter 13 bankruptcy protected Roni from creditors' calls while putting her on a five-year repayment plan, after which her remaining debt would be erased.

Continued: On a budget and on the edge

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Monday, August 10, 2009 5:55:32 AM
Our economy is based on a house of cards, that is easy credit cards to buy consumer items to keep people employed. The chicken's have come home to roost consumers are tapped out the politicians changed the bankruptcy laws to help the low life banks suck every last penny from the consumers with extra fee's and high interest rates. Most people would pay back there balances if the banks would set up realistic terms, lower interest rates drop fee's and lower payments. Why do you think most people get into trouble, lost jobs divorces reduced hours during these tuff economic times the politician and banks need to reach out with a helping hand they will still make money, just not as much. The consumer's are hurting we need help but, Washington is to busy fighting amongst themselves and listening to well funded special interest groups.
Monday, August 10, 2009 6:10:56 AM
I do have to say that I participated in a debt management plan.  Fortunately, I was able to concentrate on paying that down and not incurring any additional debt for the duration of the pay-back.  For me it worked well.  I had debt from a divorce that was easier to assume than fight over (I am a woman).  I put it in their hands and was so happy when the final payment went out.  A few things though, that hurt at that point.  I was contacted by a "counselor" who told me that "traditionally" people make one extra payment at the end of their commitment, just as a 'thank you" to the company.  I did politely (LOL) tell her that I had paid plenty for the life of my payback, and that she should remember that they tacked an additional $5 on to the payment at one point to cover additional administrative costs.  I felt that I had paid enough to them, thanked her for all their help, and she did not badger me.  And what do you know...a few weeks after that was all paid off I received a pre-approved credit card from the company that wouldn't deal with me in the first place to work arrangements out, and I said, thanks, but no thanks...We all have to realize when to say "NO"!! 
Monday, August 10, 2009 6:55:05 AM

It's interesting that some think debt overload is caused by irresponsibility.  However, I know many people that the reason of their debt is education.  Once they have graduated they couldn't find a good job (especially recently).  Myself, I almost $90,000 in debt for an undergrad and MBA however the only job I have been able to find only pays me $40,000.  There is this call to do more go further in your education to make this country better-but there currrently is no reward.

Monday, August 10, 2009 6:55:53 AM

"Yes, let's blame all of it on "EVIL" political parties.

Of course it has zero to do with discipline and EVERYTHING to do with the spoiled brat who holds his breath and screams " I want it all and I want it right now."

 

The reason those E V I L capitalists ( which is what making money is all anout, capitalism), are and were filling the wants of the cluess and immature self absorbed consumer. You know, the guy or gal with the leased car, the new clothes, the boat, the jet runner, the store credit card.

 

Hey, heres a clue: "Live Below your means and don't use credit cards!!

Wow, hey, just think how all of this could be avoided. "Boo Hoo, Poor over extenended child, living beyond his means>

Guess what? I own a car and have no debt and my home was one I scould afford and is nearly paid off! I SACRIFICED!!

Monday, August 10, 2009 7:04:03 AM
it fails because anyone who gets into trouble to begin with FAILS TO UNDERSTAND THAT NOT PAYING BILLS IS STEALING! THEY DONT CONSIDER THEMSELVES THEIVES WHEN THEY STIFF "SEARS" OR "MACYS"...OR THE ELEC. COMPANY....?........... HA!
Monday, August 10, 2009 7:11:35 AM

Also, I did not incur college debt cause I got a loan from my employer, in exchange to work for this employer for 3 years once m y schooling was complete.

 

One can work and save the money or find employers who do pay for college in exchange to work in, say, an area of the country where their trade is in great need.

 

People go inot great debt to borrow money for schooling, when a little research or even going to a local Community college would have more than sufficed.

Alot of loans went to supprt  a lifestyle and students who did not want to work and attend schooling.

 

Maybe not you, but many folks who borrowed money did and do this.

I cleaned houses on weekends and did not own a car and went to a local tech school and transferred to a 4 year college once I found an employer who would pay my way to college.

Monday, August 10, 2009 7:22:42 AM

The credit card companies are creating some of their own problems.  When they raise the interest rate on an existing balance to 31.99% with no notice (Chase), when they lower your credit limit to LESS than you currently owe and then charge overlimit fees and increase your interest rate to the default rate because you went past your limit.  Maybe if the credit card companies would hold up their side of the bargain without looking to screw as many people as they can before legislation goes into effect that would rein them in a little, more customers would hold up their side of the bargain and pay their bills off under the terms originally agreed upon.

Monday, August 10, 2009 7:34:17 AM

Due to my husband's and my parent's medical/nursing/living expenses we found ourselves $70K in debt.  We tried for years to obtain help for them but their yearly incomes were $98.00 and $204.00 over the limit for help.

 

We signed with a counseling agency in 2001.  It was a large payment but we managed by driving clunkers and living in a rental home.  In 2004 our debt counseling agency itself went bankrupt!  To this day we have not been reimbursed for our last payment.

 

We signed with another management company in 2004.  It has been a very long, very hard struggle but our August payment will be our last. Now at age 72 we are finally debt free, hurrah!

 

Would we have been better to declare bankruptcy... probably.  However, we have the peace of mind knowing we did what was right for our parents and we did not cheat our creditors.   That allows us to sleep much better at night. 

 

Monday, August 10, 2009 7:34:23 AM
"ITS THE CREDIT CARD COMPANIES FAULT"...?.........ITS BECAUSE OF "STUDENT LOANS".....?...... SIGH???........EXCUSES...EXCUSES....I'LL SAY IT AGAIN,YOU DON'T PAY BACK WHAT YOU BORROW THATS CALLED STEALING! THANKS TO ALL YOU PEOPLE FOR MAKING MY CASE WITH YOUR LAME EXCUSES... YOU'ALL WILL NEVER CHANGE!!!
Monday, August 10, 2009 7:43:44 AM

Even the best planned budget can be upset by a true emergency need for cash - e.g., injury to an uninsured person, or even to an insured person who has a deductible, co-pays, or needs to kick in more for better treatment for which insurance doesn't cover as much or at all.

 

However, old habits are hard to break.  It is rare someone who got into financial trouble due to frivolous spending decisions will permanently modify his/her purchase behavior for a lifetime.

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