About Credit Counseling Agencies

Consumer Credit Counseling agencies do not provide loans, and instead attempt to restructure your debt. Because most major creditors have hardship programs in place which allow for reduced payments and lower interest, and generally have a financial relationship with these agencies, your creditors generally prefer these types of programs.

This is because in the end, you often end up paying more than what you originally owed, and because the contract you sign with the agency is often very restrictive.

How Credit Counseling Services Work

What credit counseling debt management programs do is make you pay a fixed monthly payment directly to the agency, which then takes not only a piece of your payment, but then also receives a commission from your creditors for collecting on your debt.

Few people understand that this relationship exists, but it in fact does.

So despite how these agencies promote themselves, consumer credit counseling agencies typically do not negotiate with creditors. The truth is they merely set up their client accounts according to each specific creditor's hardship policy.

An Example Of Credit Counseling At Work

As an example, say you owed $1,000 to Fleet Bank, and Fleet's hardship policy required a minimum payment of 2.2% of the outstanding balance. In this case, the credit counseling agency would set up a payment schedule for you that was based on $22.

If your regular minimum payment was, say $35, you would be receiving a payment reduction. In many cases, however, there is little reduction, and sometimes, it actually results in an increased payment.

On the other hand, if you were past due on your regular payments and were unable to catch up, this revised payment may reduce your obligations. This is because as part of the relationship counseling agencies have with creditors, some penalties can be lessened.

It is also important to understand that some creditors will not lower the payment or offer any forbearance on loan accounts. So therefore, secured debt is generally not applicable.

Much Depends On The Creditor

With the typical credit counseling agency, how much your overall monthly payment can be reduced depends entirely on who the creditors are, the type of debt and the amount owed to each creditor. In some instances the savings can be substantial, but in most it may be negligible.

The Bottom Line

So basically, what Consumer Credit Counseling agencies do is something you could probably do for yourself. If you wanted to go from creditor to creditor, and apply for their hardship programs, you could essentially save money, as you would not have to pay either the agency, nor for the commission that the agency collects from your creditors.

Credit Counseling Agencies are effectively middlemen between you and your creditors. They all collect fees and commissions from you, whether they are non-profit, or for profit.

In fact, often for-profit companies are more above-board than their non-profit cousins.

It is best that you understand this, and especially the fact that you save very little by using them. Which, if you are encountering serious financial difficulties, can be a real problem.

Attorney-Led Debt Management Programs

Attorneys that offer a debt management program typically act similar to credit counseling agencies. Other attorneys, however, may truly negotiate with creditors in an attempt to settle their client's debt.

Aegis specializes in this third type of program, known as "Debt Settlement". The service we provide is different than that attorneys provide, simply because attorneys always charge an hourly rate. This rate is typically charged regardless whether a favorable settlement is reached or not.

While in some cases this attorney/client relationship may prove favorable, in most cases it can be incredibly costly - a poor choice when you are encountering real financial difficulties.