The Two Things You Should Know About Those “Non Profit” Credit Counselors

“There are two ways of meeting difficulties: you alter the difficulties, or you alter yourself to meet them.”- Phyllis Bottome

The first credit counseling agencies were created in 1951 in the United States when credit grantors created The National Foundation for Credit Counseling, or NFCC. Their stated objective was to promote financial literacy and help consumers avoid bankruptcy. NFCC was really started as a collection agency for Sears and J.C. Penney, along with other major creditors, to help recover money lost to bankruptcy.

In 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 made credit counseling a requirement for consumer debtors filing for bankruptcy. In order to meet this requirement, during the 180-day period preceding the filing of bankruptcy, the debtor must complete a program with an approved nonprofit budget and credit counseling agency. Such a program may include, but is not limited to, one counseling session conducted by phone or over the internet. In addition, a post-filing debtor education credit counseling session is required in order to complete the bankruptcy process and to have your debts discharged.

A credit counseling agency typically receives most of its compensation from the creditors to whom the debt payments are distributed. This funding relationship has led many to believe that credit counseling agencies are merely a collections wing of the creditors. This fee income, known as “Fair Share,” are contributions from the creditors that originally earns the agency 15% of the amount recovered. The use of the term “non profit” suggests that the company is a charitable organization. This is so far from the truth that it is borderline ridiculous.

Here’s how the Consumer Credit Counseling companies actually work.

First they claim to have a special arrangement thousands of creditors, implying that they can reduce your debt. Truth be told, they will only reduce your interest rate and you will be in their program for between 5 and 7 years. You will pay back everything that you currently owe PLUS interest. If you are suffering a true financial hardship, this would not be the most ideal situation for you.

They do however have a special relationship with the creditors. Remember they are funded by the banking industry that includes your creditors. They are supplied a computer database with all of your personal information by your original creditor that promised your information would be held in confidence.

After the initial consultation, or sales pitch, where you provide them the names and account numbers of your creditors and the balances owed, a plan is formulated to tell you what you will pay and for how long. They seldom mention the effect that their program has on your credit report because now your accounts will appear as managed by xyz company. This is commonly referred to as bankruptcy’s brother because the effect that it has is as bad as bankruptcy.
Now come the fee’s. There is really no standardized procedure governing what they can charge and some agencies charge up to $5 per month per account enrolled, some charge a flat rate fee of up to $49.95 per month NOT including your debt payment. Also, you must remember that they get as much as 15% from your creditor for these same accounts.
Do you still think that they are non profit?

Doesn’t there appear to be a conflict of interest issue between these non profits dipping into your pocket and getting commissions from your creditor?

I don’t know about you but I wouldn’t trust a company that claims to be a charitable debt hero that makes their money from the people you owe money to.

The following are some questions to ask when you are looking into a debt relief company:

How much are their fees for your service?

What are the fee’s for since you are non profit?

Do you negotiate the balance of my debt to reduce my payments?

How will my credit be affected byyour program?

When will my credit be improved?

What is the total amount of fee’s that I will pay to your company over the course of our contract?

What will my total savings be?