I’ve been meaning for a long time to write a bit about credit counselling. I think it’s often seen as a cure-all for people wanting to address their debts but afraid of bankruptcy. Alternatively, going to credit counselling is sometimes painted as “just as bad” as filing for bankruptcy. Realistically, I think credit counselling is of some use to some people. It’s also of no use to some people.
My biggest concern is that people often misunderstand that a non-profit credit counselling agency provides a free service. They do…and they don’t. Many credit counselling agencies provide free education and some community outreach. They have active outreach programs to other social services providers, and in fact get a lot of referrals from social workers and others who see people in debt and don’t know how best to advise them. However, one of the main services that credit counselling agencies provide is the DMP – the Debt Management Plan. This is a form of debt consolidation in which the agency acts as an intermediary to allow the debtor to make a single payment that gets split across all creditors. This can be immensely useful for people who are struggling to keep track of all their various debts. Entering a DMP also allows the agency to intervene between collectors and the debtor, meaning most collection calls will stop. That alone is of huge value to a lot of people. Even though a debtor can do most of what a credit counselling agency does by himself and for free, many people would much rather have the agency alongside them as a sort of project manager/consumer advocate.
BUT…
Debt Management Plans are NOT FREE. The credit counselling agencies charges for this service – it’s not uncommon for them to take a 10% (or higher) “cut” of every monthly “debt payment” the client makes. Is that reasonable? Maybe. We gladly pay for lots of things, even things that we could do ourselves for free. Most people don’t cut their own hair. Some people don’t mow their own lawns. Most people visit restaurants at least occasionally. Nothing wrong with that. My concern, however, is that the level of awareness most people have of this cost is quite low. I’d like to see more clarity for debtors to understand that this is a service they are paying for.
In the meantime, here’s an article about credit counselling agencies. I recently spoke to Michelle Warren of Bankrate.com about this very subject.
http://www.bankrate.com/can/news/cc/Mar12_choose_credit_counsellor_a1can.asp