What Is It?
Credit counselors are professionals who can help you with your financial difficulties for a fee (either a flat fee or an hourly rate). Typically, a credit counselor contacts your creditors and negotiates a compromise regarding the repayment of your debts. Some arrange for consolidation loans. Often a credit counselor can persuade a lender to reduce its interest rate, waive late fees and penalties, or accept a longer repayment term. This allows you to pay off your debts in an orderly and affordable manner.
Some credit counselors may also offer other services, such as investment advice, once you have resolved your debts. Some even claim success at persuading creditors to forgive debts completely when the debtor faces extreme financial hardship.
Caution: With few exceptions, however, there is little that a credit counselor can do that can't be done by a nonprofit credit counseling service such as the Consumer Credit Counseling Services (CCCS) . The advantage of going through CCCS is that fees are minimal and can be waived if you are unable to afford them. A professional credit counselor may take an occasional pro bono case but typically must collect fees to make a living.
Professional credit counselors are quick to point out that they have no relationship with any creditors. You pay them for their services, so you are their client. In contrast, nonprofit credit counseling services, such as CCCS, are funded almost entirely by creditor contributions and donations. Many speculate that this makes the nonprofit credit counseling service merely a collection agency for the major creditors.
When Can It Be Used?
If you are having trouble with your finances, you definitely qualify for some form of credit counseling assistance. However, professional credit counselors charge fees for services rendered. Accordingly, you should have a few coins left in your piggy bank when you go to see one, although most will offer a free initial consultation.
May Avoid or Reduce Interest, Late Fees, and Penalties
Credit counselors can frequently negotiate with your creditors to reduce or eliminate interest and penalties, reduce payments, and extend terms. This makes repayment more feasible for you.
Professional Credit Counselors Work for You
When you hire a professional, you are the client. Professional credit counselors typically collect 100 percent of their fees from the debtor and nothing from the creditors. Accordingly, there is no question regarding conflicts of interest when the counselor is negotiating a repayment plan.
Professional Credit Counselors Can't Help Everyone
If you have nothing left, no way to fund a repayment plan, and no way to pay the counselor's fees, then a credit counselor may be unable to help you.
You May Spend a Lot of Money and End Up In Bankruptcy Anyway
All too often, debtors pay a credit counselor to restructure their debts or formulate a repayment plan, only to find out that it can't be done or that they still can't afford the monthly payments. These debtors end up in the office of a bankruptcy attorney, shelling out even more cash to pay attorney's fees. If there is no hope for your case other than bankruptcy, a reputable credit counselor should tell you this before taking any fees.
Make an effort to seek out a reputable credit counselor. Look for one that has been in business in your community long enough to have established a track record and a good reputation. Talk to more than one, and compare notes. Compare what a credit counselor has to say about your case with what a CCCS counselor has to say about your case. Get the opinion of an attorney, also. All of these should offer free initial consultations.
Are There Tax Implications?
In some cases, a credit counselor can negotiate for a reduction in the principal balance of your loan or total loan forgiveness. When all or part of a loan is forgiven, the amount forgiven may be considered taxable income to you. In contrast, when you receive a discharge of your debts by order of a federal bankruptcy court judge, the amount discharged is not deemed taxable income to you.
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