Not everyone with a lot of debt ends up declaring bankruptcy. Some of
them aren't eligible to do so. Others feel strongly that declaring bankruptcy is not the morally correct thing
to do - they feel that they should make every effort to pay their debts.
Some of these people turn to consumer credit counseling. Non-profit credit counseling organizations do not lend
money to the person in debt. Rather, they work with the debtor's creditors to try to work out a reduced payment
plan, a consolidation of debt, or a reduction of interest rates or late fees - thus making it possible for the
debtor to repay his or her debts over a period of three to five years. The debtor makes a single payment to the
counseling service, and the counseling service makes payments to the creditors.
Non-profit credit counseling services were "invented by" some of the major credit card companies and
are funded by donations from creditors. The creditors realize that they are better off working with debtors who
want to pay them back rather than making it harder for them to do so. They count on the counseling services to
teach people about debt management and budgeting.
The counseling services also relieve the creditors of the additional work necessary to collect debts. It's important
to note that many creditors make a notation on the debtor's credit report indicating that the debt is being managed
by credit counseling.
Consumer credit counseling services usually work well for the consumer, but sometimes there are problems. The consumer
might be making payments to the credit counseling service on time, but the service isn't making payments to the
creditors on time. This shows up on the consumer's credit report as late payments.
It is also possible that the credit counseling service is making the payments on time, but the creditors are not
accepting the reduced payment amounts. This, too, would negatively affect the consumer's credit report.
However, the lender can get a printout from the service, indicating the date the consumer entered it, the creditor's
listed, and the history of the consumer's payments. The lender can then piece together the information. If the
consumer has been paying consumer credit counseling on time, but the creditors have been getting their payments
late, then that's not the fault of the consumer and shouldn't reflect poorly on him or her.
How Do Lenders View Credit Counseling Services?
Some lenders look at use of credit counseling services as similar to a
Chapter 13 bankruptcy, because both can entail a payment plan and re-negotiation of debt payments. (and, in fact,
some people who are using a credit counseling service do end up filing bankruptcy because they still don't have
the income or money management skills to handle the payments.) So, in some cases use of such a service can be a
negative.
However, many lenders recognize that if a person is attempting to handle debt responsibly, then that person probably
takes financial commitments seriously. Again, the lender must look at the "big picture." In general,
in order to get a mortgage the borrower must have a 12-month history of paying on time and a letter from the counseling
service stating that purchasing a home will not interfere with the repayment plan.
