Debt Consolidation vs Credit Counseling vs Bankruptcy

Yesterday I saw a segment on NBC’s Today Show which reminded me of my college days.

There was a time when I contemplated debt consolidation… or credit counseling… or even bankruptcy.

This was Ivan’s question for money expert Jean Chatzky:

I am a 21-year-old college student with a lot of debt. I owe $15,000 and the credit card companies don’t stop harassing me because I can’t even pay the minimums. My income barely covers those minimum payments. I attempted to consolidate my credit but backed out last minute due to all the articles I read. Someone told me my best bet was to file for bankruptcy. Any advice?

Hearing Ivan’s situation made me flash back to my own college days when I, too, was in debt up to my ears.

Jean Chatzky‘s recommendation for Ivan was basically to try credit counseling. Here’s why, plus what to look for when you’re trying to find a reputable credit counseling company…

 

I Know How Ivan Feels…

When I was a college student, I racked up charges (on all those credit cards they give you every time you walk into a store!) so badly that I had contemplated getting some financial help from professional credit counselors. I thought about consolidating my debts. But I have to admit, the idea of filing bankruptcy also crossed my mind. (I know — STUPID idea! But bankruptcy is often made to sound like the easiest way wipe out all your debts and start fresh.)

You see, when you’re young and in charge of your own finances, you don’t always feel comfortable talking to your parents about something like this — especially when you’re “the good child” and supposed to be “in control of your life” and “on the path to success”… you get the idea.

Plus, you don’t want to let on to your friends either. You don’t want them knowing that you’ve got this “secret” — because they’d surely think less of you if they knew that you were barely keeping your head above water. Right?

That’s why I’m thankful to people like Jean Chatzky, Dave Ramsey, Suze Orman who are available to answer questions and provide help for people (of all ages) in financial distress. No matter your question, they’ve got the answer!

 

Advice From The Pro’s

Specifically, with regard to Ivan’s question above, Jean Chatzky said NOT to choose bankruptcy and to instead consider consumer credit counseling.

I thought her best advice was regarding how to find a “reputable” credit counseling service. She said you have to ask the following questions:

[Basically, you interview them before putting a stranger in charge of your finances.]

• Are they affiliated with a national body like NFCC? That will ensure that they are legitimate, because these organizations require strict quality and financial/ethical standards for membership.
• Are they accredited by the Council on Accreditation or another third party? Are they a nonprofit?
• Board members shouldn’t be paid by the agency, or be family members or friends.
• Do they offer a wide range of services, including budget counseling for those not in debt, debt counseling, housing counseling for prerental, prepurchase, first-time homebuyers, reverse mortgage and foreclosure prevention?
• What are the fees? They should be forthcoming about fees, and nothing should be charged prior to a service provided. Any setup/monthly fee should be less than about $50 (most monthly fees are in $25 range). The agency should be willing to waive all fees in cases of true hardship.
• Do they offer in-person counseling, by phone, Internet? What are you looking for?
• Are the counselors certified consumer credit counselors?
• Do they provide educational classes or workshops?
• Does the agency work with all of your creditors (some only work with those who agree to pay them)?
• Is there a minimum amount of debt required? There shouldn’t be.
• What are the options? If a debt management plan is the only one, keep looking. Each situation is different, and the solution they come up with for you should be customized.
• An initial session length of an hour is standard; any less and you should be concerned that they have an adequate idea of your situation.
• Will the full amount of your payment go to creditors? It should, not into the agency’s pocket.
• Ask for written evidence that the agency is bonded and insured.
• Check with the Better Business Bureau and the state attorney general’s office to see if there are any unresolved complaints about the company.

Those are EXCELLENT questions that will help to sort out a good counselor from one who’s only after your money!

 

Why Pay Someone To Help When You’re Already In Debt?

Quite honestly, I didn’t think that it would ever make sense to use credit counseling services — until hearing this from Jean Chatzky yesterday. In fact, I used to think that credit counselors were just out for your money — sort of like vultures lying in wait to take advantage of helpless prey.

But Jean made one thing perfectly clear: While it may sound strange to pay someone to help you pay your bills on time (especially when you’re already in debt over your head!), she says that legit counselors can actually make your life much easier by working directly with the credit card companies (and other people you owe money to). And sometimes, professional credit counselors the only ones who can effectively communicate with the creditors.

As a result, they are able to consolidate all of your payments into one lump sum and stay on top of the payments for you. (Because, after all… you’ve proven that you aren’t so good at doing it yourself.)

Jean’s information also helped me rationalize why credit counselors do deserve a small monthly fee for their time and services. Just make sure that you keep it within the $25 to $35 a month range, that’s all.  Any higher, and they mightnot be as reputable as they would seem.