When to Seek Debt Counseling

Determine whether you're a candidate for credit counseling

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Many people slowly accumulate credit card debt or other debts and then one day realize that they owe so much that they do not know how to repay it. While some assume that declaring bankruptcy is the only way to make a financial recovery, you can also consult a debt or credit counseling service to help you manage your debt.

Receiving debt counseling from a credit counselor can help you avoid the far-reaching negative effects of bankruptcy, which can stay on your credit report for 10 years and make it harder to get a loan, a home, life insurance, or even a job. Even so, debt counseling isn't for everyone. Understanding what debt counseling offers and when it's appropriate is the first step to becoming debt-free.

Basics of Debt Counseling

When you seek out a credit counseling service, it will match you with a credit counselor who can provide advice on how to manage your money and debt, help you create a budget, and point you to instructional resources and workshops. Your debt or credit counselor will generally review your entire financial picture, looking at your monthly bills, expenses, debts, and income. They will then recommend a personalized plan for dealing with your debt. The first counseling session usually lasts one hour, but follow-up sessions may be required.

If you are overwhelmed by the number or size of your debts, or cannot repay them, your credit counselor may offer to put you on a debt management plan, which is a special type of repayment plan negotiated with your creditors and managed by a credit counseling service.

If you agree to repay your debt through a debt management plan, your creditor may lower the interest rates, waive fees, or otherwise help lower monthly payments associated with your debts. You will make a single monthly payment to the counseling service, and it will pay creditors on your behalf according to a negotiated payment schedule. This approach can make repaying your debt much easier.

Although working with a debt counseling service or starting a debt management plan won't directly affect your credit score, the fact that you're using one may be added as a note to your credit report. In addition, a debt management plan may lead you to close credit accounts, which can lower your credit utilization and negatively affect your score. Alternately, it can help you develop a history of on-time payments, which can improve your credit score.

The terms of a debt management program may stipulate that you can't obtain new credit or use credit cards while you're enrolled in the program.

When to Use Debt Counseling

You may want to engage a credit counselor if:

  • You need professional advice. The initial counseling session allows you to get advice for managing your debt from a certified credit counselor who is trained in credit, money, and debt management, often for free. This means you don't have to spend money to relieve your debt woes.
  • You have a lot of unsecured debt. Unlike secured debts that use your property as collateral, such as mortgages and installment loans, unsecured debt like credit card debt doesn't use property as collateral and therefore tends to come with higher interest rates. If your payments are unmanageable as a result, it's useful to seek out a counseling service to get a personalized plan for managing your unsecured debt.
  • You are behind on payments or can't make minimum payments. If either scenario applies to you, you're likely overwhelmed by debt and may benefit from having a credit counselor formulate a personalized plan for handling the debt or enrolling in a debt management plan through the service.
  • Your creditors or collection agencies are calling you. If you can get past-due accounts or collection accounts added to your debt management plan, you will receive fewer calls, although it can take months to stop receiving them.
  • You want to consolidate or lower your monthly payments. Enrolling in a debt management plan allows you to stop making separate payments to each of your creditors and instead make one payment to a credit counseling service that will then distribute the money to your creditors. It can also help lower your payments, which can help you pay down and get out of debt faster.

Finding a Credit Counselor

Not all debt counseling services are reliable. In general, reputable services are offered by non-profit organizations, including credit unions, universities, and government housing agencies. The United States Trustee Program maintains a list of credit counseling services that offer pre-bankruptcy counseling.

It's important to check the qualifications of any credit counselor that you visit as well as review customer feedback through the Better Business Bureau before you use a debt counseling service. In addition, ask potential counselors key questions including:

  • What services do you offer?
  • Where do you provide services (at a local office, online, by phone, or in person)?
  • What, if any, setup and ongoing fees do you charge for services?
  • What is the payment schedule for fees?
  • Do you offer any free educational resources or workshops?
  • Are your counselors accredited or certified?

Do your due diligence on any credit counselor you consider; not all non-profit credit counseling services are reputable.

Alternatives to Debt Counseling

There are other approaches for managing debt besides using a credit counseling service.

  • Consult a financial advisor. A financial advisor can help you develop a budget and set up a debt repayment plan that will accelerate how fast you can pay off your debt, although they will not negotiate your interest rates and monthly payments as a credit counselor might. Fee-only financial advisors, which are preferable because they charge no commissions and must work in their clients' best interests, may charge hourly, a flat fee, a monthly retainer, or a percentage of assets (if you invest with them). While an hourly fee structure can become an expensive proposition, you may be able to develop a financial plan to get out of debt in as little as one session with your advisor.
  • Take a class. If you don't feel comfortable visiting a financial advisor, enroll in a class that provides information on how to manage debt. Find one at your local community college or university, or take an online course like Dave Ramsey's Financial Peace University.
  • Start a group. Additionally, you can establish a debt management group and recruit members with money management or debt problems so that you can offer support to each other. The group approach adds accountability to your budget and allows you to bounce your concerns and frustrations off of others who are going through the same situation.
  • Do it yourself. If you have debt but aren't overwhelmed by it, self-help may be all the help you need to manage it. You can take certain steps that a debt counselor would take on your own. To start, set up a budget so that you know where your money is going each month. Then, set up a debt repayment plan. A common plan is to list all your debts, apply extra money to the debt with the highest interest rate until it is paid off, and then move on to the next debt. You can also negotiate lower interest rates yourself by calling your creditor and asking for a lower rate or transferring your credit card balance to a balance transfer card that charges less or even no interest.

The Bottom Line

Debt counseling can provide you the professional guidance you need to manage debt without having to declare bankruptcy. It's particularly useful for those who are overwhelmed by the number or size of their debts. If you go with a credit counseling service, find a reputable creditor counselor who can truly help you turn your financial situation around.

Know that there are many other options to consider in lieu of a credit counseling service, from financial advisors to do-it-yourself money management. The right debt management strategy for you is one that factors in your financial picture and your willingness to get help from others.