No matter how you find yourself in debt, owing substantial sums of money to creditors can be a stressful and difficult situation. This is particularly true for individuals who have families to support or who find their financial dreams hamstrung by a low credit score. Debt can arise from a number of sources, including mortgages, credit cards, car financing, and past-due household bills. Fortunately, there are many ways to get your finances back on track. One of the most commonly used methods is credit counseling. A credit counseling company can provide clients with debt counseling services and help them establish a plan that will assist them with meeting their financial obligations.
How to Select a Credit Counseling Agency
When selecting a credit counseling agency, it is important to make sure that the agency is reputable and offers a fair price. Most of these services are not offered for free, but obtaining credit counseling should not put you further into debt. Some companies charge debtors by collecting a percentage of the amount of money that they are able to save you. Additionally, it is important to ensure that the agency provides educational information as part of the price, and does not impose additional fees for these materials. Unfortunately, some of these companies take advantage of individuals who are in debt and collect a fee without providing any real and meaningful counseling. If you have doubts about a particular credit counseling agency, check with your local Better Business Bureau to see whether the company has found itself in any trouble.
Reviewing Your Finances and Developing a Plan
After selecting a credit counseling agency, you will sit down with a counselor and review your current finances. After determining the nature and extent of your financial situation, the counselor will utilize a number of tools to help reduce your debt and consolidate your payments. It is imperative to find the appropriate debt solution that works best for your finances. Initially, your counselor may engage in negotiations with your creditors to see whether they will be willing to accept a lower amount of money. Although this seems unrealistic, many creditors are willing to accept a smaller payment if it means getting a portion of their money back sooner. If the creditor accepts, you may be required to make a lump sum payment, or make a series of payments over the course of a set schedule.
In addition to debt negotiation and settlement, a credit counselor may be able to consolidate your debts and arrange a new repayment plan that better suits your financial situation. Each credit counseling company offers different debt consolidation and repayment plans. In most situations, debt consolidation applies to non-secured debts, which are debts that are not backed by a form of property, like a house. If you are looking for a way to manage your home mortgage or other security-backed debt, you may wish to seek a loan modification with your lender. Common examples of unsecured debts include credit cards, personal loans, and other lines of credit.
Debt Management Plans
One of the services that a credit counseling agency may offer is the creation of a debt management plan, which is a plan designed to help renegotiate outstanding debts and consolidate payments into one monthly expense.
Typically, each of these debts is subject to an interest rate, which accrues monthly and may even recapitalize. Recapitalization occurs when the monthly interest is added to the principal. As a result, the next month’s interest payment will be higher due to a larger principal balance. A credit counselor can work with your creditors to lower these interest rates in addition to finance charges and over-limit fees. Many debts are also subject to a repayment limitation, requiring the debtor to repay the debt within a predetermined period of time. A credit counselor can also negotiate the repayment term.