Working with a credit counsellor
By Michelle Warren • Bankrate.com

If you hesitate to answer the phone for fear it might be another creditor demanding payment, then you know the helpless and hopeless feeling of being in deep in debt. With 3.1 credit cards in circulation for every Canadian over the age of 18, bad debt is like a fast-spreading disease.

However, an increasing number of people are turning to credit counsellors for remedies to help control spending and get back in the black.

"Financial problems have the same psychological effects on people that a serious illness does," says Duke Stregger, executive director of the Credit Counselling Service of Toronto, a nonprofit charitable organization. "(Counselling) has been a godsend for thousands."

Who uses credit counselling?
People turn to credit counsellors for a variety of reasons: they want to avoid bankruptcy, they've fallen behind on payments, creditors are breathing down their necks, debt is no longer manageable or high interest rates mean debt isn't decreasing.

They may also seek out a counsellor because of a change in income due to illness, job loss, strike, pregnancy, divorce or simply the desire to be debt-free.

Asking for help isn't easy, and counsellors recognize this. "We respect and admire anyone who has the courage," says Scott Hannah, executive director of the Credit Counselling Society in Vancouver, B.C., and chair of the public relations committee of Credit Counselling Canada, the nonprofit industry's national association.

Hannah says member agencies adhere to a code of conduct, offering professional, nonjudgmental support and confidentiality. Fees tend to be lower than at privately owned agencies as nonprofits are funded by credit granters, such as banks, credit card companies and even department stores. It's in a creditor's interest that people gain control of finances rather than go bankrupt.

How does it work?
Each year, hundreds of thousands of Canadians turn to credit counsellors. To find a nonprofit credit counselling agency where you live, check the Yellow Pages, do a quick web search or consult the CCC web site.

Ultimately, says Stregger, "Our job is to teach people how to manage their money."

Counsellors work with clients online, over the phone or face to face. Services range from money-management seminars to teaching budgeting basics, helping people deal with bill collectors, devising payment plans or managing debt consolidation or third-party debt-settlement programs.

"Our goal is provide objective information and advice so our clients are in a position to gauge what's right for them," says Hannah.

In turn, clients should "put everything on the table," says Stregger. This means being upfront about how you manage money, as well as your income, expenses, assets and liabilities.

"In some cases it's as simple as showing an individual with a short-term problem how to solve his problem with his creditors," says Hannah, adding clients are never pressured into a decision.

However, there are times when bankruptcy is the only option. This usually happens when "people come to us too late," he says, adding that, more often than not, those who are already resigned to bankruptcy discover it can be avoided. For more information about personal bankruptcy, read Bankrate.ca's story "Declaring personal bankruptcy."

Counselling brings fresh eyes to a situation and gives clients much-needed breathing space. In most cases, says Stregger, "as soon as (creditors) find out someone is working with us, they back off."

While counselling is free, there are nominal fees for certain programs -- usually 5 per cent or less of the renegotiated payment or settlement amount.

Debt repayment programs
About 25 to 30 per cent of clients opt for debt repayment plans, or DRPs. The counselling agency, which has established relationships with creditors large and small, negotiates on a client's behalf, seeking lower monthly payments and interest rates. In some cases, they can negotiate no interest payments at all.

The client regularly deposits money into a trust account from which the agency pays down the debts, keeping back a small percentage for its fee.

It's a solution for people who have some surplus income but aren't able to settle debt through conventional means, such as a consolidation loan. But not everyone qualifies: for example, if a client owns a $500,000 home, he can't use a DRP to eliminate $30,000 in credit card bills and avoid interest.

Committing to counselling
"We usually tell people it took you a while to get into the mess, and it's going to take you a while to get out," says Fran Smith, executive director of Credit Counselling Services of Alberta.

While counselling is an open-ended relationship, programs usually require a three- to five-year commitment.

"We focus on the entire picture -- the changes you make will have an impact on all aspects on your life," says Hannah.

Still, reasonable payments should allow for a few of life's pleasures, such as the odd movie. The hardest thing for most people is surrendering their credit cards.

About 80 percent of clients complete their programs. Defaulting or pulling out can have major consequences, as creditors are informed and people not only lose their low- or no-interest status but risk further damaging their credit rating.

When is debt settlement an option?
For those seeking a clean break, debt settlement or third-party debt negotiation involves clearing debt for less than what is owed, usually at least 50 percent.

"We do very few of them," says Smith, adding that creditors have to buy in and the client must have the total money on deposit since the negotiated settlement must be paid in full once a deal is reached.

Clients may opt for this if, for example, they come into money from an inheritance or from selling their home or car. Creditors agree because they know the client will likely never be able to pay the full amount, and they prefer reclaiming a lump sum than having it trickle in.

If living with overwhelming debt is akin to having a serious illness, then gaining control of one's finances is the miracle cure. "I really believe in the social value of credit counselling," says Stregger. "People have said 'you saved my life -- literally.'"

Michelle Warren is a writer in Toronto.