Credit Counseling & Debt Relief Services

Reputable credit counseling organizations can advise you on managing your money and debts, help you develop a budget, and offer free educational materials and workshops. Their counselors are certified and trained in consumer credit, money and debt management, and budgeting. Counselors discuss your entire financial situation with you and help you develop a personalized plan to solve your money problems. An initial counseling session typically lasts an hour, with an offer of follow-up sessions.

Most reputable credit counselors are non-profit companies and offer services through local offices, online, or on the phone. If possible, find an organization that offers in-person counseling. Many universities, military bases, credit unions, housing authorities, and branches of the U.S. Cooperative Extension Service operate non-profit credit counseling programs. Your financial institution, local consumer protection agency, and friends and family also may be good sources of information and referrals.

But be aware that “non-profit” status doesn’t guarantee that services are free, affordable, or even legitimate. In fact, some credit counseling organizations charge high fees, which they may hide, or urge their clients to make "voluntary" contributions that can cause more debt.

If your financial problems stem from too much debt or your inability to repay your debts, a credit counseling agency may recommend that you enroll in a debt management plan (DMP). A DMP alone is not credit counseling, and DMPs are not for everyone. Don’t sign up for one of these plans unless and until a certified credit counselor has spent time thoroughly reviewing your financial situation, and has offered you customized advice on managing your money. Even if a DMP is not appropriate for you, a reputable credit counseling organization still can help you create a budget and teach you money management skills.

In a DMP, you deposit money each month with the credit counseling organization. It uses your deposits to pay your unsecured debts, like your credit card bills, student loans, and medical bills, according to a payment schedule the counselor develops with you and your creditors. Your creditors may agree to lower your interest rates or waive certain fees. But it’s a good idea to check with all your creditors to be sure they offer the concessions that a credit counseling organization describes to you. A successful DMP requires you to make regular, timely payments; it could take 48 months or more to complete your DMP. Ask the credit counselor to estimate how long it will take for you to complete the plan. You may have to agree not to apply for — or use — any additional credit while you’re participating in the plan.

The Federal Trade Commission (FTC) works to prevent fraudulent, deceptive and unfair business practices in the marketplace and to provide information to help consumers spot, stop and avoid them. The FTC has found that some organizations that offer DMPs have deceived and defrauded consumers, and recommends that consumers check their bills to make sure that the organization fulfills its promises. For more information on Debt Management Plans, visit FTC Facts for Consumers.

Debt settlement programs typically are offered by for-profit companies, and involve them negotiating with your creditors to allow you to pay a “settlement” to resolve your debt — a lump sum that is less than the full amount that you owe. To make that lump sum payment, the program asks that you set aside a specific amount of money every month in savings. Debt settlement companies usually ask that you transfer this amount every month into an escrow-like account to accumulate enough savings to pay off any settlement that is eventually reached. Further, these programs often encourage or instruct their clients to stop making any monthly payments to their creditors.

Although a debt settlement company may be able to settle one or more of your debts, there are risks associated with these programs to consider before enrolling. These programs often require that you deposit money in a special savings account for 36 months or more before all your debts will be settled. Many people have trouble making these payments long enough to get all (or even some) of their debts settled, and end up dropping out of the programs as a result. Before you sign up for a debt settlement program, review your budget carefully to make sure you are financially capable of setting aside the required monthly amounts for the full length of the program.

Your creditors have no obligation to agree to negotiate a settlement of the amount you owe. So, there is a possibility that your debt settlement company will not be able to settle some of your debts — even if you set aside the monthly amounts required by the program. Also, debt settlement companies often try to negotiate smaller debts first, leaving interest and fees on large debts to continue to mount.

Because debt settlement programs often ask or encourage you to stop sending payments directly to your creditors, they may have a negative impact on your credit report and other serious consequences. For example, your debts may continue to accrue late fees and penalties that can put you further in the hole. You also may get calls from your creditors or debt collectors requesting repayment. You could even be sued for repayment. In some instances, when creditors win a lawsuit, they have the right to garnish your wages or put a lien on your home.

If you do business with a debt settlement company, you may have to put money in a dedicated financial institution account, which will be administered by an independent third party. The funds are yours and you are entitled to the interest that accrues. The account administrator may charge you a reasonable fee for account maintenance, and is responsible for transferring funds from your account to pay your creditors and the debt settlement company when settlements occur.

Before you sign up for the service, the debt relief company must give you information about the program:

Price and terms. The company must explain its fees and any conditions on its services.

Results. The company must tell you how long it will take to get results — how many months or years before it will make an offer to each creditor for a settlement.

Offers. The company must tell you how much money or what percentage of each outstanding debt you must save before it will make an offer to each creditor on your behalf.

Non-payment. If the company asks you to stop making payments to your creditors — or if the program relies on you not making payments — it must tell you about the possible negative consequences of your action.

The debt relief company also must tell you: the funds are yours and you are entitled to the interest earned; the account administrator is not affiliated with the debt relief provider and doesn’t get referral fees; and you may withdraw your money at any time without penalty.

There could be tax consequences for debt forgiveness. If a portion of your debt is forgiven by the creditor, depending on your financial condition, any savings you get from debt relief services can be considered income and taxable. Credit card companies and others may report settled debt to the IRS, which the IRS considers income, unless you are “insolvent.” Insolvency is when your total debts are more than the fair market value of your total assets. Insolvency can be complex to determine. You may want to consult a tax advisor or tax attorney to learn how forgiven debt affects your federal income tax. 

For more information, visit the IRS website and its article on reporting of canceled debt (opens new window).

Avoid any debt relief organization — whether it’s credit counseling, debt settlement, or any other service — that: charges any fees before it settles your debts or enters you into a DMP plan; pressures you to make "voluntary contributions," which is really another name for fees; touts a "new government program" to bail out personal credit card debt; guarantees it can make your unsecured debt go away; tells you to stop communicating with your creditors, but doesn’t explain the serious consequences; tells you it can stop all debt collection calls and lawsuits; and guarantees that your unsecured debts can be paid off for pennies on the dollar.

Avoid any debt relief organization that: won’t send you free information about the services it provides without requiring you to provide personal financial information, like your credit card account numbers, and balances; tries to enroll you in a debt relief program without reviewing your financial situation with you; offers to enroll you in a DMP without teaching you budgeting and money management skills; or demands that you make payments into a DMP before your creditors have accepted you into the program.

You may be able to lower your cost of credit by consolidating your debt through a second mortgage or a home equity line of credit (opens new window). But these loans require you to put up your home as collateral. If you can’t make the payments — or if your payments are late — you could lose your home. What’s more, consolidation loans have costs. In addition to interest, you may have to pay "points," with one point equal to one percent of the amount you borrow. Still, these loans may provide certain tax advantages that are not available with other kinds of credit.

Personal bankruptcy also may be an option, although its consequences are long-lasting and far-reaching. People who follow the bankruptcy rules receive a discharge — a court order that says they don’t have to repay certain debts. However, bankruptcy information (both the date of the filing and the later date of discharge) stay on a credit report for 10 years and can make it difficult to get credit, buy a home, get life insurance, or sometimes get a job. Still, bankruptcy is a legal procedure that offers a fresh start for people who have gotten into financial difficulty and can't satisfy their debts.

There are two main types of personal bankruptcy: Chapter 13 and Chapter 7. Each must be filed in federal bankruptcy court. Filing fees are several hundred dollars. For more information visit the United States Courts (opens new window). Attorney fees are extra and vary.

Chapter 13 allows people with a steady income to keep property, like a mortgaged house or a car that they might otherwise lose through the bankruptcy process. In Chapter 13, the court approves a repayment plan that allows you to use your future income to pay off your debts during three to five years, rather than surrender any property.

Chapter 7 is known as straight bankruptcy. This can often eliminate most debt.

Both types of bankruptcy may get rid of unsecured debts and stop foreclosures, repossessions, garnishments and utility shut-offs, as well as debt collection activities. Both also provide exemptions that let you keep certain assets, although exemption amounts vary by state. Personal bankruptcy usually does not erase child support, alimony, fines, taxes, and some student loan obligations. And, unless you have an acceptable plan to catch up on your debt under Chapter 13, bankruptcy usually does not allow you to keep property when your creditor has an unpaid mortgage or security lien on it.

You must get credit counseling from a government-approved organization within six months before you file for any bankruptcy relief and complete a debtor education course before your debts can be discharged. You can find a state-by-state list of government-approved organizations at the U.S. Department of Justice (opens new window).

Also, before you file a Chapter 7 bankruptcy case, you must satisfy a "means test." This test compares your income to the median income for the same size household in your state. If you make less than the median, you’re presumed to qualify for a Chapter 7 bankruptcy. If you make more than the median, you may need to file a Chapter 13 bankruptcy instead. In some instances you may still be able to file a Chapter 7, so you should speak with an experienced bankruptcy attorney to help you understand your options.

For more information on ways to deal with financial debt, read the FTC’s Coping with Debt article.