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Debt counseling is designed to help those who are struggling with debt they cannot repay. With this service, an individual with experience in debt counseling will help you prioritize your bills and help you make a budget and plan to repay the debt.
He or she can also advise on the best next steps to take if you don’t have any disposable income to put toward unpaid debt.
If you cannot pay your bills and have been thinking about filing for bankruptcy, you should avoid taking that step until you consult with a certified debt counseling service. If you do decide to file, you will be required to attend credit counseling sessions by the bankruptcy court.
When you attend your first debt counseling session, you should bring information about your monthly income, your monthly expenses, and all your outstanding debts. The debt counselor will review this information to help you come up with a budget. This may involve looking for areas where you can cut expenses to put more money toward debt repayment.
If you are unable to pay your bills, the debt counselor can negotiate with credit card companies on your behalf to lower your interest rates and/or your monthly payments. You will no longer use your credit cards. Instead, you will make one payment to the debt counselor each month, who will distribute this payment to your creditors.
This strategy, which is known as a debt management plan (DMP), can make it easier to manage your monthly expenses and make progress toward paying off credit cards and other debt. It can also help you budget because you are making the same payment each month, typically for up to 48 months. Before enrolling in a DMP, ask the debt counselor these questions:
When working with a debt counselor, it’s important to make sure that he or she is qualified. Check the firm’s credentials with the Better Business Bureau to determine whether it has been the subject of consumer complaints. You can also check with your state’s consumer protection agency and attorney general’s office.
You should ask for references from former clients. Online reviews are a great source of information about credit counseling agencies.
Look for a non-profit credit counselor. Most agencies offer services in person as well as online and over the phone, so you can choose a firm with a method you prefer.
When you are selecting a debt counseling agency, the Federal Trade Commission recommends asking the following questions:
Debt counseling is not the ideal solution for everyone. If you are working with a credit counselor and negotiate lower monthly payments or interest, it may negatively affect your credit score. If your score has already been damaged by late payments, however, credit counseling may ultimately get you back on the right path.
The amount of debt that constitutes too much debt depends on your overall financial picture. However, most experts recommend keeping debt payments, including your mortgage, under 31% of your gross (before-tax) income.
Explore alternatives before deciding to work with a debt counselor. If you’re concerned about damage to your credit, consider seeking assistance from a financial planner. He or she will charge an hourly rate to help you make a budget and meet financial goals, including debt repayment. You may also be able to find free or low-cost financial planning courses through your local community center, school, library, or church.
If you need help repaying your debt, check out Solvable today. We match individuals just like you with well-reviewed companies that have experience with debt counseling.
Answer a few basic questions about your credit card, student loan, and/or tax debt to get started on the path to a better financial future.