The counselor will try to get your creditors to waive late fees, lower interest rates or accept smaller monthly payments -- maybe all of the above. Once the payment plan is set, you send a single check to the counseling service, which then forwards the money to your various creditors. You may have to agree not to take on any more debt while you participate in the program. Most credit counseling services also want you to attend educational classes to help you stay out of money trouble in the future.
Now here are the negatives. Some credit counseling services receive funding from credit card companies, so they may have a conflict of interest. Critics say these services aren't likely to tell you if bankruptcy is your best bet, because they don't want to lose their wealthy donors.
Credit card companies hate bankruptcies, because that means the customer gets off scot free. Card companies prefer customers who enroll in credit counseling programs because at least they're paying, even if they pay slowly. Perhaps the best thing to do is get advice from a bankruptcy lawyer and a credit counseling service and see which seems best for you.
You should also know that enrolling in a credit counseling service does not shield you from getting negative entries on your credit report. The counseling service won't report anything to the credit bureaus, but your creditors will. If a creditor agrees to accept a smaller payment from you, it may report the loss. At the very least, your creditors will probably report that you are part of a credit counseling program. Lenders seeing that on your credit report later may consider it a negative that you couldn't manage your money on your own. On the other hand, you'll have better luck getting loans later if your credit report shows a steady stream of payments than if you go it alone and default entirely.
You should know that illegal credit repair firms often mimic genuine credit counseling services to lure customers. Credit repair companies don't emphasize paying down your debt. Instead, they claim they can help you erase negative entries from your credit report -- even if they're true. It's a scam and it's illegal. It's also the subject of the next subchapter!
Do your homework.Interview several credit counseling services before making a commitment. Think about it: You're sending these people most of your money each month. You want to make sure they're legit. Two reputable national firms are Consumer Credit Counseling Service 800 251-CCCS (2227) and the National Foundation for Credit Counseling 800-388-2227.
Before you sign anything or start sending money, do a background check. Call the Better Business Bureau and your county and state consumer protection offices to see if there are any complaints against the counseling service.