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Credit counseling before bankruptcy
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If you are planning to file for bankruptcy, think again. No longer it is easy to file for bankruptcy. Credit counseling has become mandatory before you file for bankruptcy. This simply means when you file for bankruptcy, credit counseling needs to be undertaken and the eventual results need to be submitted with your bankruptcy filings. Credit counseling is helpful in the sense that you will get acquainted with debt management and different debt plans that can help you get out of debt. However, filing for bankruptcy is not a piece of cake as it used to be until recent times especially after the law that took effect that credit counseling is now required. You can get credit counseling on the internet or over the phone without showing up in person to meet a debt counselor.
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Credit counseling before bankruptcy
One of the few things about the Bankruptcy Abuse and Consumer Protection Act, which took effect this week, that actually seemed like a good idea was the notion of mandatory counseling for bankruptcy filers. While that idea has its problems, such as the fact that many filers are people who lost jobs, and not reckless gamblers who can't manage money, there are some good points. It's a fact that most Americans never receive any type of formal financial training, and sitting people with problem debt down with a trained professional to discuss his or her financial troubles makes a lot of sense. If more people were trained a bit better in how to manage their money, we'd have fewer people filing for bankruptcy.
Like it or not, the bill is now law and the counseling is required for anyone who wishes to file. Now there's a new problem - the Government requires that any counselors first be approved by the US Trustees before they can counsel pre-bankruptcy filers. The law is already in place, but for the most part, the counselors are not. And that could be a huge problem for anyone who wishes to file soon.
As of a week ago, only about 40 counseling agencies had been approved, and that's a nationwide figure. That's forty companies to handle the estimated one and a half million bankruptcies that take place in this country every year. Obviously, forty companies cannot handle that many people for one on one consultation, so what happens now?
The law does provide for some solutions. Counseling can take place via phone or over the Internet, and it is expected that many consultations will not only be conducted that way, but will be done in groups. Not very effective, but it does count for something, we suppose. In areas where counseling isn't available at all, the law will waive the counseling requirement, so prospective filers may have an out in that regard.
On the other hand, talking to people in groups, over the phone or over the Internet doesn't really offer the kind of hand-on attention that a problem as serious as bankruptcy requires. Worse, the debt consultation industry doesn't exactly have the best reputation these days, with the Justice Department investigating a number of agencies for rather questionable activities. Now we've added the requirement that people seek help and pay for it, while not guaranteeing that they actually receive something of value. Perhaps this problem will resolve itself in time, but for now, anyone who needs a professional consultation for their problem debt will have a lot of trouble finding someone to help them.
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How credit counseling affects your credit
You may have seen the ads on television - non-profit agencies set up to help you escape debt by offering a credit counseling service. They promise to "consolidate" your debt into one lower payment at no cost to you. The way they get paid is through donations from your creditors. They negotiate with all of your creditors to lower your interest rates and payments. You pay the counselor the sum of your creditors' payments. They send the payments to the creditors. In exchange, the creditors pay the counselor a donation.
Sounds like a good deal, right?
Before committing to such a service, you must understand what their purpose is. In order to attain a non-profit status with the IRS, they must provide actual educational services to consumers to help with their debt management, budgeting, and so forth. Currently, the IRS is auditing many of these organizations. So far, they have found that these credit counselors do not provide such a service and only exist to receive fees from creditors. They have revoked the non-profit status from several companies.
These companies are called "predatory credit counselors." They take your monthly payment, and instead of shipping it off to your creditors, they pocket the money for themselves.
These bad apples have put the consumer in a real dilemma. The new United States bankruptcy laws will require debtors to enter a credit counseling program before actually entering bankruptcy.
In theory, credit counseling can be a great service when executed correctly by all parties involved. That is, the counselors actually provide an educational service and the consumer actually learns and implements what they're told. This can pave the way to a secure, debt-free future. What can you do to avoid becoming a victim?
First, find out if there are any fees charged to you by the counseling agency. Even if they're non-profit, they may still charge you for their services up-front, such as a setup fee. A reputable company won't charge you exorbitant amounts for fees, as that would defeat the purpose of seeking their assistance in the first place.
Next, try to ascertain how your counselor is paid. If they make a salary, you're in good shape. If they work for commissions or earn bonuses based on steering you towards more expensive debt consolidation programs, be wary. Good counselors will do what's best for your pocket, not theirs.
Just because the credit counselors work with creditors doesn't mean creditors work with that particular company. When a consumer enters a credit counseling program, the counselor sends a proposal to the creditor. The creditor then has the option of approving or rejecting the proposal. If rejected, there is nothing further that can be done with that particular creditor. You'll have to negotiate with them on your own. Call your creditors directly and make sure they will accept the proposal first.
Get all promises and terms made by the counselor in writing. A verbal promise is not binding. As well, make sure the counseling agency sends monthly reports that outline every transaction; how much you paid them and where the money is going. Verify that your money is actually paying your creditors, and not your counselors.
How does entering credit counseling affect your credit? It depends on an individual lender as to how they view credit counseling. Your counselor will have you believe that it's a positive because you're taking proactive steps to get your debts in order. However, many lenders view credit counseling as the final step before bankruptcy. Entering counseling might signal to them that you have a debt management problem, and suspect that you may default on their loan. In fact, many lenders will deny your application outright if you're currently in a debt management program, as if you were in an non-discharged bankruptcy.
If you're in a situation that might require credit counseling, or even bankruptcy, check your credit report first. Make sure that your report is completely accurate. If necessary, take steps to increase your credit score. You might benefit more from taking out an actual loan to consolidate your debts than to enter debt management and bankruptcy. You can only get a loan if your scores are high enough. Make an effort to raise your scores, get a consolidation loan, and make sure you never get into the same debt situation again!
Frank Bruno has spent the last 3 years assisting hundreds of clients in saving thousands of dollars in Interest rates by teaching them unique techniques on how to quickly and dramatically raise their credit scores. For more information please visit his website- http://www.CreditScoreBooster.com
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