Guide to Credit Counseling: 7 Key Questions to Ask

It’s no secret that financial education is sorely lacking in the U.S. However, this does not mean that you can’t seek financial education from reputable sources. If you have little to no knowledge on the topic of personal finance and are struggling with your finances, then you may consider credit counseling.

Credit counseling can involve a variety of services including educational materials and real-world application to your finances. Credit counselors can help you to set a budget and advise you on how to manage debt and your money in general.

According to the Federal Trade Commission (FTC), reputable credit counseling organizations have certified counselors who are trained in consumer credit, money and debt management, and budgeting. Credit counselors will work with you to come up with an individualized plan to address the money issues you are facing.

Seeking credit counseling is typically voluntary but can be required when filing for bankruptcy. In this guide, we’ll answer some key questions you might have about credit counseling and whether it’s right for you.

How Do You Find a Credit Counselor?

Before settling on a credit counseling organization, do your homework to make sure they are not only reputable but will also be the most helpful for your particular financial circumstances. Check with your state’s attorney general and the consumer protection agency present in your state to see if there have been any complaints filed.

When looking for a good credit counseling agency, first ask about what information or educational materials they provide for free. Organizations that charge for information are typically more interested in their bottom line than helping you. Also, ask about the types of services they offer. Limited services can be a red flag. The fewer services they offer, the fewer solutions they may provide you.

You do not want to be pushed into a debt management plan simply because that is their top service. And make sure you understand the organization’s fee system, not only how much services will cost but also how employees are paid. If employees make more based on the number of services you receive, look for another credit counseling organization.

MagnifyMoney has come up with a list of some of the best credit counseling options, which are a great place to start. If you are looking for credit counseling as a pre-bankruptcy measure, the U.S. Trustee Program has a list of approved credit counseling agencies that can provide pre-bankruptcy counseling.

How Much Does Credit Counseling Cost?

Credit counseling can involve both start-up and monthly maintenance costs. The Department of Justice has said that $50 per month is a reasonable fee. Further, the National Foundation for Credit Counseling (NFCC) has suggested that a start-up fee should not exceed $75 and monthly maintenance fees should not be more than $50 per month.

Credit counseling agencies may offer fee waivers or fee reductions, depending on your income levels. Where credit counseling is required, the DOJ requires that if the household income is less than 150% of the poverty line, then the client is entitled to a fee waiver or reduction. While the poverty line varies depending on household size, it ranges from $11,880 for a single person family household to $24,300 for a family of four.

Other regulations, such as when fees can be collected and circumstances that would warrant fee reduction or waiver, may also be set forth by your state.

How Long Does Credit Counseling Last?

While the length of your credit counseling session depends on the complexity of your financial problems, sessions typically last 60 minutes. After the initial session, credit counselors will then follow up to ensure you understand the actions you needed to take and that you have been able to get started on the plan they developed. Another session may be necessary if you see a significant change to your financial situation.

What Do You Accomplish with Credit Counseling?

According to the NFCC, reputable counseling involves three things. First, a review of a client’s current financial situation. You cannot move forward unless you know where you are starting. Second, an analysis of the factors that contributed to the financial situation. You don’t want bad habits to undermine your progress. Lastly, a plan to address the situation without incurring negative amortization of debt. This gives you a place to start in improving your financial situation.

What Is the Difference Between Credit Counseling and Debt Management Programs?

A debt management plan is just one solution a credit counselor may recommend based on your financial situation. Having a debt management plan is not the same as credit counseling.

A debt management plan involves the credit counseling organization acting as an intermediary between you and your creditors. Each month you will deposit an agreed upon amount of money to your credit counseling agency, which will, in turn, apply it to your debts. The credit counseling agency works with your creditors to determine how the amount will be applied each month as well as negotiates interest rates and any fee waivers. It’s important to call your creditors directly to check whether they are open to negotiating interest rates or offering waivers for fees. In some cases, a credit counseling firm may promise to negotiate those things for you but be stonewalled when they discover a creditor isn’t even open to the discussion.

Before agreeing to a debt management plan, make sure you understand any fees associated with the debt management plan and any choices you might be giving up. For example, some debt management plans may have you agree to give up opening up new lines of credit for a specified period of time. Remember that a debt management plan is just one of many solutions a credit counselor may advise you to consider.

How Does Credit Counseling Impact Your Credit Score?

Not directly. While the fact you are in credit counseling may show up on a credit report, that fact does not affect your score. The actions you take as a result of credit counseling can impact your score. For example, if you don’t choose a reputable credit counseling agency, the agency may submit the payment on your behalf late to your creditors, which can damage your credit score. So even though you submitted your payment on time to the credit counseling agency, it is possible that the credit counseling agency will issue a late payment on your behalf. This is why it is important to make sure you use a reputable credit counseling agency.

Who Should Consider Credit Counseling and When?

While credit counseling is sometimes required, like in instances of bankruptcy, you always have an ability to seek credit counseling. Bankruptcy attorney Julie Franklin, based in Boston, Mass., explains, “For bankruptcy purposes, there are two course requirements — a debtor must complete the first credit counseling course prior to filing and obtain a certificate that is filed with the court in their initial bankruptcy petition documents. Post bankruptcy filing, the debtor is required to take a second course, and upon completion, the certificate that is issued must be filed with the court in order for the debtor to obtain an order of discharge.”

Anyone struggling with personal finance should consider credit counseling as a viable option so long as they use a reputable credit counseling agency. Franklin also notes that “the first credit counseling course is a tool for debtors as it compels the individual taking the course to closely examine the household assets, income, liabilities, and spending habits to determine if there’s a way to ‘save’ the debtor from having to file bankruptcy.” If you are considering bankruptcy, you will have to attend some credit counseling anyway, but it could also help you to avoid filing for bankruptcy.

Voluntary credit counseling might not help if you are already being sued to have a debt collected. However, you may be able to negotiate terms with the debt collector that result in a withdrawal of the suit if you agree to enroll in credit counseling and possibly a debt management program. Not all creditors will agree to such terms, but it is possible.

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Worst-Case Scenario: What Does a Late Payment Do to My Credit Score?

Missing a single loan payment may seem like a small faux pas, but it can actually do big damage to your credit score, particularly if it’s your first slip-up.

A 30-day late payment can lower a good credit score of 780 by 90 to 110 points, according to a study by major credit scoring model FICO; and an average score of 680 can drop by 60 to 80 points.

In a best-case scenario, you’ll be able to resume good payment behavior and see your score rebound.

“When an account is brought current and is once again reflecting positively on the credit report, the score should immediately begin to rebound and improve over time, as long as there are consistently on-time payments and no balance increases or credit applications,” Barry Paperno, a credit scoring expert who worked at FICO for many years and now writes for SpeakingofCredit.com, said in an email.

Negative information can generally take up to seven years to age completely off of a credit report. (Bankruptcies can take up to 10 years. You can go here to see what a worst-case scenario bankruptcy could do to your credit.) However, Paperno said, a consumer could see their score return to its pre-late-payment days in a few years.

In a worst-case scenario, one late payment will lead to bigger credit woes.

“For most consumers, a single or occasional late payment shouldn’t trigger additional score drops,” Paperno said. “Yet if the late payments continue, multiple late charges can raise a [credit card] balance by enough to also raise the credit utilization percentage — and lower the score further. Eventually, left unpaid, the debt can be assigned to a collection agency and/or lead to a court judgment, each of which can add to the damage.”

Given that payment history is the most important factor among credit scoring models, you’ll want to get ahead of any problems that could arise by missing a bill (or two or three or four).

When to Contact Your Creditor

If you accidentally missed a payment and your history was pretty stellar up until that point, you can contact your issuer to see if they’ll give you a pass and refrain from reporting the incident to the credit bureaus. They may also be willing to waive the late fee.

If you know you’re unable to make payments on a loan indefinitely (or at all), you can contact your issuer to see if you can work out a payment plan.

Settling with the creditor is likely to still affect your credit, but could prove less costly than letting a defaulted loan go to collection or judgment. (You can find tips for negotiating with a creditor here.)

If your credit has already been damaged by a missed payment, you may be able to improve your score by paying down high credit card balances, disputing errors on your credit report and making all future loan payments on-time. You can track your progress as you work to rebuild your credit by viewing your two free credit scores each month on Credit.com.

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Worst-Case Scenario: What Does Bankruptcy Actually Do to My Credit Score?

Help! Do I Have to Go Through Foreclosure After Bankruptcy?

It’s the big, bad boogeyman of credit scores: bankruptcy. A formal declaration that you are incapable of paying off all your debts as agreed. And while taking such action could spare you from paying off all — or at least some — of the loans that put you so badly in the red, you can expect your credit to take a pretty big hit.

“Consumers should be aware that declaring bankruptcy has the greatest single impact on credit scores,” Rod Griffin, Director of Public Education at Experian, said in an email. “When you declare bankruptcy, you take legal action so that you do not have to repay your debts, or only have to repay a portion of them. While you are no longer responsible for your debts, the fact remains that you did not pay them.”

But how badly can this hurt you? Here’s how bankruptcy actually affects your credit scores.

What’s the Damage?

It can be hard to pinpoint exactly how much of hit your score will take once bankruptcy appears on your credit report. That’ll vary depending on what else is on your report and where your score stands at the time. But, generally speaking, the higher the score, the harder the fall.

“Someone with a high FICO score (mid 700s or above) could see their score drop as much as 200-plus points as a result of a bankruptcy posting to their file,” Ethan Dornhelm, a principle scientist for the popular credit scoring model, said in an email. Someone with a more average score of 680 could experience less of a drop (between 130 and 150 points, FICO found). But, in all scenarios, you’ll likely find yourself saddled with bad credit (think below 600) post-bankruptcy.

How Long Will My Score Be Depressed?

Here’s even more bad news for those who file bankruptcy. “bankruptcy can remain on your credit report for 10 years, and can affect your ability to obtain credit during the entire time,” Griffin said. (Note: The major credit reporting agencies will typically remove completed Chapter 13 cases seven years from the filing date.) And your score will also be subject to any negative occurrences that happened before you filed.

“If the accounts included in bankruptcy were delinquent at the time of filing, they will be deleted seven years from the original delinquency date,” he said. “The original delinquency date occurred before the bankruptcy, so the accounts will be deleted before the bankruptcy public record.”

The good news is your score should start to rebound almost immediately after the bankruptcy hits your report, assuming no new negative information arises, of course.

“FICO research found that for a representative consumer with a 680 FICO score (before the bankruptcy filing), it would take them roughly 5 years to return back to that same score level,” Dornhelm said.

While that score won’t help you qualify for the best terms and conditions, it could be enough to net future financing. (Mortgage experts, for instance, peg the the minimum credit score requirements for conventional home loans at around 620.)

And there are some steps you can take to avoid a long-term worst-case scenario, including:

  1. Make sure the bankruptcy is reported correctly. In order for the healing process to begin, make sure all the accounts included in your bankruptcy are marked as discharged and labeled with a zero balance on all of your credit reports. You can check your credit reports for free by pulling them at AnnualCreditReport.com.
  2. Start establishing a positive payment history. Payment history is generally the most important factor among credit scoring models, so it’s imperative you demonstrate an ability to repay loans as agreed. “One possible approach to re-establishing credit is to apply for a secured credit card and continually make all of your payments on time,” Dornhelm said. “As time passes and the impact of the bankruptcy lessens, you might apply for a traditional credit card and also continually make all of your payments on time.” You can also monitor your progress as you try to fix your credit by viewing your two free credit scores each month on Credit.com.
  3. Get the bankruptcy removed from your credit reports as soon as it’s eligible for deletion. If your bankruptcy is appearing on your report after that 10-year mark, you can dispute its inclusion with the credit bureaus. You can go here to find out more about getting errors off of your credit reports.

[Offer: If you’re worried about errors on your credit reports and you don’t want to go it alone, you can hire companies – like our partner Lexington Law – to manage the credit repair process for you. Learn more about them here or call them at (844) 346-3296 for a free consultation.]

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Bankruptcy May Be an Option to Discharge a Portion of Student Loans

Depressed man slumped on the desk with his hands holding credit card and currency

The common message to student loan borrowers is that any loan taken out will have to be repaid in some way because student loans cannot be discharged in bankruptcy. So no matter how dire the situation gets, you’ll be expected to pay back your student loans. But is this really the ultimate truth or is it possible to discharge some of your student loan debt in bankruptcy? 

Quick student loan overview

Student loan debt comes in many forms, primarily being split between government and private loans. Government loans are provided to students with the full financial backing of the Federal government. With this backing, many government loans have favorable interest rates, recently not rising above 7%. Other loans are issued privately, either through banks or loan companies. As these do not have government sureties, terms are less favorable, meaning interest rates are often higher and loan terms far shorter.

But I thought student loans wouldn’t get discharged through bankruptcy? 

For those looking at the possibility of bankruptcy, the myth that student loans are non-dismissible has been paraded around for a while. This myth may be behind the findings that less than 1% of bankruptcy filers included their student loans in their debt to be discharged, even though 40% of filers would have been eligible for at least a partial dismissal. For many filers, a lack of income can lead to some of their loans being discharged.

With this myth being discredited, it could still lead to some filers not being able to get a full or partial dismissal, as their income may disqualify them because it’s too high. However, even though they may be earning an adequate income, the burden of paying their student loans may be ever present. For filers to be aware of where they stand, they need to see if they pass the Brunner test.

Learn more about the Brunner test here: 8 Steps for Possibly Discharging Your Student Loans Through Bankruptcy

If a filer doesn’t pass the Brunner test, he or she may still have another option available.

Discharging living expenses covered by student loans

This method requires that a lot of boxes be checked, but if they are, then a large portion of loans can be discharged.

Should it be determined that the student loans were used to pay for living expenses while in college, and the loans were made improperly, this may hit a grey area in Higher Education Act. An “improper” student loan could be one made to a student who wasn’t an eligible student of an institution, or the school wasn’t eligible for financial aid and shouldn’t have issued a student loan. These arguments have been made and won from a student of a flying school and a student of a training institute.

According to the law, student loans should be used for cost of attendance and not for living expenses. Even though a student has signed a contract stating it will be used for these purposes, if a loan was made improperly, then it can nullify the contract leaving the loan open to being discharged. What qualifies for a qualified education expenses or not, requires an audit of everything the loan was spent on. This method can prove to be hard especially if receipts were not kept, and notes of when and where the student loan was spent.

It’s far more likely for loans to be discharged due to improper issuance, so seek to understand your situation fully to see if you qualify.

Where do I go from here?

If you’re finding yourself looking at bankruptcy and want to see if you can get your living expenses discharged, or even your entire loan, you need to research the school / college you attended to understand if it was accredited at the time you attended. Then seek to understand what amount of your loan was spent on qualified expenses versus living expenses. By knowing these two types of information, you can approach your bankruptcy proceedings and use one or both of these methods to try and eliminate your debt.

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Is Bankruptcy the Answer to My Debt Problem?

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Q. I can never seem to get ahead of my credit card debt. At what point should I consider bankruptcy? — Falling behind

A. You’ve got plenty of thinking to do before you turn to bankruptcy.

First, you need to take a close look at your budget.

If you have a regular source of income, you need to determine how much monthly excess income you have to dedicate to credit card payments, said Ilissa Churgin Hook, a bankruptcy attorney with Hook & Fatovich in Wayne, N.J.

“Many people are surprised when, after taking the time to prepare a written budget, they see on paper how much money they are spending on ‘extras,’” Hooks said. “Perhaps you have room to reduce your discretionary spending in order to dedicate more money to paying off your credit card debt.”

(You can see how long it will take you to pay down your credit card debt using the Credit.com credit card payoff calculator.)

If you can’t find savings in your budget, or if it will take you many years to pay off the debt while interest and fees continue to accrue, you may want to consider a bankruptcy filing.

You first need to decide which chapter(s) of the bankruptcy code you qualify for, and which chapter is best for you. That determination will require a complete analysis of your assets, liabilities, income and expenses, Hook said.

Most individuals seek relief either under Chapter 7 or Chapter 13 of the United States Bankruptcy Code, Hook said.

“Generally, in a Chapter 7 case, a debtor seeks a discharge from his/her debts in exchange for exposing his/her assets to an examination by a third-party Trustee, who acts as a fiduciary for creditors,” Hook said.

One of the Trustee’s obligations is to look for assets that have equity — after taking into account the costs of sale, any liens against the asset, and any relevant bankruptcy exemptions — that can be liquidated to pay creditors, she said.

That means you need to consider if any of your assets would be at risk — liquidated by a trustee — if you were to seek a Chapter 7 discharge of your debt, Hook said.

Hook said that you can only receive a Chapter 7 discharge (pursuant to which the credit card debt would be discharged or “wiped out”) once every eight years. Therefore, you need to consider whether you should use that opportunity now, or wait.

Further, not all individuals qualify for Chapter 7, depending on household income and expenses, she said.

In a Chapter 13 case, an individual or a married couple with regular income can reorganize his/their debts while retaining assets, Hook said.

“A Chapter 13 case usually lasts three to five years and allows a debtor to repay his/her debts over time via a court-approved payment plan,” Hook said. “The length of the Chapter 13 plan depends on the debtor’s income and ability to make monthly payments.”

She said additional interest on unsecured debts such as credit cards and medical bills does not accrue during the life of the Chapter 13 plan.

A Chapter 13 debtor must demonstrate to the court that he/she can pay monthly expenses including rent/mortgage, utilities, food, auto expenses and more as they become due, and have a surplus to dedicate to paying at least a portion of their old debt.

Hook recommends you consult an experienced bankruptcy attorney regarding all of the relevant facts of your specific situation.

You should also look into a reputable credit counseling firm, which may be able to help you create a debt repayment plan without a bankruptcy. (Editor’s Note: A bankruptcy will impact your credit for years, depending on which type you opt to use, but your credit score will recover over time. You can monitor your bankruptcy’s affect on your credit scores for free on Credit.com.)

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