debt

10 credit counseling questions to ask

If there's a bright side to the current credit crunch with all its bankruptcies, home foreclosures and credit card defaults, it's this: Asking for credit counseling help has never been so respectable.

"People are getting help now, and that's good," says Jeannine Moore, vice president of marketing and business development at Consumer Credit Counseling Service of San Francisco. "It's a shame they need it but good it's available. And people don't feel so alone now. They can admit to their friends or neighbors that they're going through a difficult time. Some of the stigma is gone."

Once you're ready to take that plunge, start by asking these questions to find the best help:

1. What services do you provide?

The general headings "credit counseling" and "debt counseling" encompass a variety of possibilities, but the two major categories are: those that just do counseling and education (often called "credit counselors") and those that help negotiate reduction of your debts and/or actually take over making the payments for you (often called "debt counselors" or "debt management plans").

While the second may sound like a good idea when you're in trouble, that aspect of the business attracts the most negative press and requires the most vigilance on your part to make sure you're getting value for your money. Our focus here is on actual counseling services.

2. Can this organization meet the requirements of the law?

Since 2005, the law requires that anyone filing for bankruptcy must attend an "individual or group briefing" from a nonprofit budget and credit counseling agency and that someone filing under Chapter 7 or Chapter 13 must complete an "instructional course in personal financial management" before his or her debts are discharged.

If you're seeking counseling specifically for those reasons, make sure the agency you select can give you the sign-off you need. The Executive Office for United States Trustees provides a list of agencies approved to offer these services.

Similarly, if you're trying to qualify for a loan modification or refinancing under the federal government's Making Home Affordable program, you should find an approved housing counseling agency.

3. Is this a bona fide not-for-profit organization?

Some places throw around the term "nonprofit" carelessly. What you want to look for is that they have official status under Section 501(c)(3) of the Internal Revenue Service Code. To do this, visit www.irs.gov/charities and choose "Search for Charities" on the left-hand side.

In many cases, you can also find the complete financial statements (Form 990) of a charitable organization at Guidestar.com. If you don't see what you're looking for there, ask someone at the organization for their Form 990. This is public information and they are required to make it available to you upon request.

An additional word of caution: A few years ago, the IRS realized it had granted nonprofit status to more credit and debt counseling organizations than it should have and began a process of scrutinizing these and, in some cases, revoking their status. So beware, make sure you're reviewing recent data, and don't stop with this step. Continue with the rest of the questions.

4. By whom are you accredited?

Make sure the accreditation comes from a legitimate, independent third party. A few good ones to look for are the Better Business Bureau and the National Foundation for Credit Counseling.

5. Are all your counselors trained and certified?

Again, look for a legitimate, independent certification from an outside organization. If the counseling company itself certifies their own workers, that's not good enough. Also look for relevant education and professional credentials. Are the firm's counselors Certified Financial Planners, lawyers, certified public accountants or other experts who inspire confidence?

6. Can you provide references?

Yes, it's good to ask that directly, but you will want to do some checking around on your own as well. Contact the local Better Business Bureau. If possible, get actual references from people who have used the service, keeping in mind that this may be difficult.

The testimonials the company puts on its own Web site from "satisfied customers" probably can't be checked directly, and your friends and business associates may not be as eager to share their experiences with credit counseling as they are to recommend a good Mexican restaurant. Still, any firsthand accounts of good service and reasonable rates should be given a lot of weight.

7. How will this solution affect my credit rating?

One of the main things you're looking for here is a realistic answer. The fact is, if you're late with paying your mortgage or credit card bills, that information probably already has, or soon will, hit your credit reports.

Beware of any company that "guarantees" to wipe your credit clean. Even if they could do that, it wouldn't be legal. Do, however, listen carefully for a commitment to help you manage your credit rating as best you can during this difficult time. Some approaches are better than others as you start paying down your debts, and a good counselor should be able to give you good advice about that without making unsustainable promises.

8. How much will this cost?

The answer to this question should be simple, and the bottom line should be reasonable. If someone starts quoting you a complicated menu of fees and percentages, you've come to the wrong place. If they say they're going to keep your first month's payment as their fee, they are almost certainly a for-profit debt management company.

The cost for an hour of counseling provided by a legitimate nonprofit firm will usually be less than $100, and sometimes even free. If you get a good price (free to low) don't worry about "getting what you pay for," but do ask the next question:

9. Who is helping to pay for this service?

Credit card companies, mortgage banks and other private businesses sometimes provide funding to credit counselors. This is not necessarily a bad thing, but it's good to be aware of it so you're not surprised. The most important thing isn't exactly who pays for the service but whose interests the provider is serving. Naturally, those things are often intertwined -- but not necessarily -- and reputable firms work to keep their advice as independent as possible.

Moore explains that, at Consumer Credit Counseling Service of San Francisco, debt management plans were always a relatively small portion of their business, but until about five years ago, the income from those was a major source of funding for the company. "Creditors used to send back 15 percent of what we sent to them," she says. "But now, they look more generally at the overall quality of what we do. They do audits and then make grants based on the quality of our education and services." This change in the firm's revenue stream, she says, has allowed them to do more actual counseling.

Grants from independent foundations with no vested interests in which debts get paid first are even better. And don't be too suspicious of people who are willing to help pay for the counseling and education of others. If there's one thing we've all gotten clearer on lately, it's that we're in this economy together. If your house goes into foreclosure, the whole neighborhood goes downhill.

10. How do you provide the service?

Good quality counseling is available in person, by telephone and over the Internet. So the important thing is just what works best for you and your learning style.

And then, ask yourself: Is this too good to be true?

If someone promises they can make all your debts disappear while magically improving your credit rating, steer clear. Credit education, counseling and assistance are all worthy services but they're not miracles. If you go in with your eyes open and your expectations realistic, though, you may find that getting some counseling helps you start feeling a lot more hopeful.

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