CONSUMER CREDIT COUNSELING

 

Who benefits from consumer credit counseling? 

 

The decision to enter a consumer credit counseling program or to file bankruptcy should depend upon the facts of an individual debtor's situation.   Our experience and expert sources tell us that both consumer credit counseling (even with a 100% payout) and bankruptcy will impact a consumer's credit similarly, especially if the consumer intends to purchase a home soon.


Once a person's debt obligations grow to the point that it is impossible to pay all the monthly payments each month, the situation has deteriorated to the point where bankruptcy is very likely to be beneficial to the debtor.  Many debtors attempt to delay the inevitable by obtaining loans through second mortgages, using cash advances, pay day loans, or loans from consumer finance companies and hope that, somehow, the situation will improve.  Usually, these loans only compound the debtor's financial difficulties.  This is especially true about "refinancings" or loans secured by a second mortgages against debtors' homes.


Debtors with  incomes that are substantially higher than average can often afford to repay at least a portion of the unsecured debts without imposing substantial hardships on their families.    Similarly, a few debtors who do not owe substantial amounts of unsecured debts (typically less than 6 months take home pay) suffer a temporary interruption of income and can repay the principal if their creditors would demonstrate some good faith and agree to reduce the usurious interest rates and finance charges.  In these conditions, we have often recommended that the potential Bankruptcy client visit a local consumer credit counseling agency.

 
In these cases, consumer credit counseling may be a viable option.  But, even these consumers need to investigate their potential consumer credit counseling agency.


Many consumer credit counseling agencies operate under a conflict of interest  that is so pervasive that it precludes the "credit counselor" from even mentioning bankruptcy, litigation against creditors, or other alternatives to "credit counseling" because most of these agencies receive a substantial portion of their funds from the very credit card issuers (or their trade groups) that their "clients" owe money to!  This is a blatant conflict of interest.


Perhaps an even more disturbing trend is the explosive growth of consumer credit counseling programs that use national media advertising to obtain "clients".   Although these agencies often claim to be "non-profit", many of them have gained large numbers of clients and, therefore, retain very substantial fees for their "advice" and "services".  Investigations have shown that many of these national agencies routinely purchase or lease real estate, services, or goods at outrageous prices from persons who control the "non-profit" agency.   Consumers should avoid agencies that do not maintain local offices or recommend borrowing against your home.


During the past several years, a substantial number of so-called credit counseling agencies that are actually conduits for predatory home loans and second mortgages have emerged.   If the consumer needs and would actually benefit from a home refinancing, the consumer should vigorously shop around to obtain the best rates and terms possible.  All too often, credit counselors are relying on and profiting from vulnerable debtors who enter into inadvisable deals without even comparing other lenders.   If a consumer encounters a "credit counselor" who solicits or offers to obtain or refer the consumer to a mortgage broker who will obtain a refinancing, the consumer should immediately cease dealing with the agency.


What written guarantees should I ask a consumer credit counselor for?


Even well intentioned consumer credit counselors often fail to advise their clients of major deficiencies in their consumer credit payment plans which render the plans useless or even counter-productive to the consumer.    Consumers should submit written questions and require written answers to the following questions:

  1. Under what conditions do you not recommend consumer credit counseling?
  2. Does your agency ever, for the record, recommend Bankruptcy as a more viable alternative to consumer credit counseling?   If so, under what specific conditions?
  3. How long will my payment program last?
  4. How much will I be required to pay each month?
  5. How much of my payment will your agency receive? 
  6. What creditors will not receive any money from your agency?  If so, which ones?
  7. How much would I be required to pay each month in order to fully repay this debt during the life of my payment program with your agency if I paid this amount each month outside your program?   If I do not do so, how much will I owe each of these creditors (including interest, late fees, over limit fees, etc.) when my payment program with your agency concludes.
  8. Are there any of my debts that will not be fully repaid during the term of my plan?  If so, which ones.
  9. How much would I be required to pay each month in order to fully repay this debt during the life of my payment program with your agency if I paid this amount each month outside your program?   If I do not do so, how much will I owe each of these creditors (including interest, late fees, over limit fees, etc.) when my payment program with your agency concludes? 
       
  10. Have any of my creditors refused to accept a reduced amount of interest as full payment of the interest due?  In other words, have any of my creditors agreed to "defer" rather than "reduce" the interest that I will owe on any debts?
  11. How much would I be required to pay each month in order to fully repay this debt during the life of my payment program with your agency if I paid this amount each month outside your program?   If I do not do so, how much will I owe each of these creditors (including interest, late fees, over limit fees, etc.) when my payment program with your agency concludes?
  12. What confirmation will I receive directly from each of the creditors evidencing that they have agreed to the terms described in your response.
  13. Will my creditors continue to send me statements so that I know that they are receiving the funds that I pay to your agency?
  14. How much money would that leave me to support myself and my family?

   If the agency or the counselor will not answer these questions in writing and provide written confirmation directly from each of the creditors, a consumer is accepting an unacceptable risk and should do business elsewhere.

Consumer problems in consumer credit counseling

Many consumers tell us that their consumer credit counseling plan imposed great hardship on them and their families.  Often, the consumer paid money to the agency with the expectation that, upon completion of the payment plan, all of their debts (excluding their mortgage), would be paid in full.  Unfortunately, many of these consumers realized that, despite their hardship, their payment program did not provide for full payment to all of their creditors although the counselor specifically told them that it did. 

Other consumers have informed us that they have paid substantial funds to a consumer credit counseling agency that converted the funds to their own use.  These complaints are particularly frequent about large, out-of-town debt counseling agencies that advertise on national media. 


Should I consider consumer credit counseling?

Many consumers enter consumer credit counseling programs without realistically calculating their family's monthly budget.  Consumers should multiply their weekly take-home pay by 4.33 (and add any other monthly income) to calculate their total monthly income. (Enter your total monthly income in item 25(A).  Consumers should prepare a budget allowing for:

HOUSING (mortgage, rent, be sure to include any prorated monthly expenses for insurance or property taxes which are not included in their escrow)
TRANSPORTATION (including car payments, gasoline, tolls, routine maintenance, and, especially for older cars, non-routine major repairs)
FOOD  (allow for lunches  and a nutritious diet)
DAY CARE
SCHOOL TUITION and PRE-PAID COLLEGE PLANS
SCHOOL LUNCHES & CHILDRENS' ALLOWANCES, LESSONS, ACTIVITIES, and other expenses
UTILITIES (power, water, sewer, garbage, local & long distance telephone, cellular phones, pager, internet access, cable or satellite television)
CLOTHING (typically at least $ 50 for a family of two adults and substantially more if you have children)
MEDICAL and DENTAL (allow for one twelfth of the family's anticipated or typical annual medical and dental expenses (including "co-payments" not covered by insurance.)
HOME MAINTENANCE (typically at least $ 100 per month)
INSURANCE:
  • homeowner's or renter's insurance
  • health insurance
  • prescription drug insurance
  • life insurance
  • automobile insurance
  • other insurance
TAX PAYMENTS (including self employment taxes)
CHILD SUPPORT, ALIMONY, or SEPARATE MAINTENANCE (if not already deducted from debtor's paycheck)
BEAUTY AIDS, TOILETRIES, HAIRCUTS, etc.
RECREATION: clubs and entertainment,  newspapers, magazines, etc.
DEPENDENTS' EXPENSES (payments for the support of additional dependents not living with the debtor)
BUSINESS EXPENSES: regular expenses from the operation of a business, profession, or farm
RETIREMENT PROGRAMS: (e.g., IRA's, 401(k)'s, Keoughs, etc.) not already deducted from debtor's payroll
SECURED CREDITORS (not included above):
STUDENT LOANS:
OTHER EXPENSES (1)
OTHER EXPENSES (2)
OTHER EXPENSES (3)
**********TOTAL OF ALL EXPENSES LISTED ABOVE*******

List this total in Item No. 25(B)

FEASIBILITY ANALYSIS:

25(A)  MONTHLY HOUSEHOLD INCOME

25(B) TOTAL MONTHLY EXPENSES

25(C) FUNDS AVAILABLE FOR UNSECURED CREDITORS (or household shortfall)

25(D) PROPOSED CONSUMER COUNSELING  MONTHLY PAYMENTS

25(E)  PAYMENTS TO CREDITORS WHO AREN'T INCLUDED IN THE CONSUMER COUNSELING PROGRAM


If your monthly household  income (Line 25(A)) is less than your  monthly household expenses (Line 25(B)), you should consult with a Bankruptcy attorney.  Consumers in this category are not a realistic candidate for consumer credit counseling.

If your monthly household income (Line 25(A)) is more than your monthly household expenses (Line 25(B)), you may, or may not, be a realistic candidate for consumer credit counseling.  Further analysis is necessary in order to decide whether consumer credit counseling or Bankruptcy would be your best alternative.

If the your monthly household  income exceeds your monthly household expenses, you should verify that the amount of the excess monthly disposable income is sufficient to pay:

 

  1. your  payments to the consumer credit counseling program;
  2. your payments to all creditors who have refused to accept the disbursements from the consumer credit counseling agency as payment in full of all obligations otherwise due.  If any creditors have deferred some of the interest or otherwise reserved the right to seek payment in addition to the consumer's payment plan, the consumer should calculate and budget an amount sufficient to repay (or amortize) the entire amount owed during the life of the credit counseling payment plan.   (See Questions 4 through 9, above.)

Only if your payments through consumer credit counseling and separate payments directly from you to the non-participating creditors are sufficient to fully pay all of your unsecured creditors within a reasonable period are you a realistic candidate for consumer credit counseling.

If the your  income is not sufficient to pay both the debts incorporated into the consumer credit payment program and all other remaining debts during the term of the consumer credit counseling program, you are  unlikely to substantially benefit from a consumer credit counseling payment program.


How much will it cost to learn about protection in Bankruptcy?

Many of our clients considered or even entered into consumer credit counseling payment plans before they sought our assistance.  We offer initial consultations without charge in order to assist potential clients in making an informed choice.  Unlike so-called "consumer credit counselors",  we work only on behalf of our clients.  We encourage you to become informed about your rights and make an informed choice.

Many if not most of our clients and former Bankruptcy clients tell us that they wish they had not waited so long.  No one has ever told us they wish they had not filed a Bankruptcy.

 

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