How to select a credit-counseling agency

4. Point yourself in a better direction. If you’re convinced that your debt problem is so out of control that you can’t wrestle it alone, a reputable non-profit credit-counseling agency may be the way to go. You can check counselors’ credentials and be connected to agencies that have made a commitment to certain professional and ethical standards through the National Foundation for Credit Counseling and the Association of Independent Consumer Credit Counseling Agencies.

5. Don’t commit to the first agency or counselor you reach. Talk to several businesses about what they can do for you and how much they charge, and do a quick online search of each agency or counselor. Your search may lead you to dozens, if not hundreds, of complaints in a matter of minutes. In addition to doing a general Internet search, you can visit this Better Business Bureau site to view an agency’s complaint history. You also can check with your state’s attorney general’s office or consumer affairs department. To start the process of finding contact information for your state, click here.

6. Clarify exactly what your counseling will include. A good counselor will sit down with you and discuss your financial situation in detail, devise a tailor-made action plan and provide you with ongoing support. Many good agencies offer budget counseling and classes in savings and debt management. A substandard counselor simply will ask you to fill out an application. Here’s another area that really matters: your counselor’s level of training. He or she should have a college degree, as well as courses in lending, credit, budgeting, saving, investing, home finance and bankruptcy. Avoid counselors who have only a few weeks of training.

7. Know what to expect. Before counseling begins, a good counselor will want to see your pay stubs, credit-card and loan statements and a filled-out form detailing your budget. Bad counselors will allow you to rely on your memory and provide rough estimates of your income and expenses.

8. Ask how the agency and its staff get paid. The agency should reveal that it receives much of its income through contributions from creditors known as “fair share.” In other words, your creditors will give the agencies a cut of the money they retrieve from you. If the agency’s staff largely gets paid based on the services they sell you, consider going elsewhere. Ditto for agencies that make you to pay a percentage of your total debt as an up-front fee. Here’s some further advice from Almond of BBB of the Southland: “Try to pay all or most of the money to the agency after the service is performed, not before.”

9. Make sure a debt-management plan is the best route. Be wary of agencies that push you into such a plan before reviewing your financial situation in detail. The truth is you may not need such a plan. You might be able to get matters under control and pay your own bills on time after benefiting from the education provided by the agency. What’s more, a debt-management plan could affect you in unexpected ways. For instance, you may not be able to seek out or use any new credit while the plan is in place.

10. Stay on high alert for expensive mistakes. If you agree to a debt-management or debt-payback plan, a counselor may tell you to stop paying your bills yourself and to send your consolidated debt payment directly to the agency instead. That can be fine – unless your creditors have not agreed to the debt-management plan, or your agency fails to pay your bills on time for you. If this happens, you could be hit with late fees and left with a credit score that’s even more damaged. And here’s some more food for thought: A debt-payback plan can take as long as two to five years to complete. If you miss any payments to the agency during that time – even if you’re years into the process – the agency may require full debt payment from you all at once. This move could force you to make a trip to bankruptcy court.

Sources and resources:

• Better Business Bureau 
• Federal Trade Commission’s “Credit Repair: Self Help May Be Best” article
• Federal Trade Commission’s “Knee Deep in Debt” article
• Consumer Reports Money Adviser
• Internal Revenue Service
• Past “10 Tips” package on msnbc.com, “When shopping and spending go too far”

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