One of the toughest parts of being in debt is that it can often feel like you have no options. Debt can be overwhelming and it tends to take over every aspect of your life. However, it’s not hopeless. While you may feel that way, he reality is that there are options out there. One option that many people consider is credit counselling, which is sometimes also called debt counselling.
When you have debt problems, it makes sense to look into all of your options. Each person’s financial situation is unique, which means there is no “one size fits all” choice that is right for everyone. Looking at your options and taking the time to understand these options is important. If you are considering debt counselling or credit counselling services, it’s important that you get as much information as possible on these services. The more information you have, the better chance you’ll have of choosing the debt relief method that’s right for you.
Understanding Credit Counselling
Debt counsellors often work with people to help them understand more about debt, help them create a budget, teach them how to use credit responsibly, and provide them with money management tips. These services can be very helpful for people who struggle with debt and don’t know how to get things under control.
There are both for-profit and not-for-profit credit counselling agencies. Most credit counselling providers offer a number of different services, which may include:
- One-on-one financial counselling
- Group courses and seminars designed to help people understand debt and credit
- Debt management plans
The services offered by a debt counselling agency will differ depending on the organization. The fees charged for these services will vary as well.
A lot of people worry that getting help with debt will ruin their credit score. The truth is that just speaking with a debt counselling service will not hurt your credit. It’s also important to note that, if you’re at the point where you’re looking for professional help to solve your debt issues, there’s a good chance that you have already damaged your credit. If you’re missing bill payments or routinely maxing out your credit cards, you could already have poor credit. Getting help with your issue may temporarily lower your credit score, but it will hopefully put you in a position to rebuild your financial life and improve your credit long-term.
What is a Debt Management Plan that Many Credit Counselling Agencies Offer?
One debt relief option that a credit counselling agency may offer is what is known as a debt management plan. A debt management plan is an informal arrangement where the credit counsellor contacts your creditors and attempts to negotiate a plan to make it easier for you to repay your debts. One way this is often done is by consolidating your debts into a single payment.
This process is designed to make paying your debt more straightforward. A lot of people who struggle with debt have difficulty remembering which debts they have to pay, when they have to make payments, and how much to pay each month. This confusion often results in missed payments, which can damage your credit rating and open you up to significant penalty charges.
In some cases, the debt counsellor will be able to negotiate a lower interest rate on your payments. If this happens, you’ll pay less in interest each month, which means you’ll save money over the life of your debt. The counsellor may also request that your creditors give you more time to repay your debts, which will make each payment smaller and easier to manage. However, with most debt management plans you will still be required to pay 100% of the debt that you owe. The goal of these plans is to make it easier to afford your payments not to reduce the overall amount you owe.
Before arranging the debt management plan, the counsellor will meet with you and discuss your financial situation. You will likely work together to make a budget and determine how much you can afford to pay to your creditors each month. The counsellor will then need to contact each of your creditors and inform them of the situation.
If some or all of your creditors agree with the plan, you will make regular payments to the credit counselling service as per the terms of the plan. The counsellor will use these payments to pay off your creditors.
Before you agree to proceed with a debt management plan, you’ll want to make sure that it works for you financially and that it will save you money. Make sure you consider all aspects of the plan. For example, if the debt management plan sees you pay less interest, this could save you money, but keep in mind that you will likely have to pay a fee to the debt counselling agency. You’ll need to make sure that the money you’re saving by going with the plan is greater than what you are paying in fees.
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Potential Positives and Negatives to Debt Counselling
Before agreeing to a debt management plan, know that each creditor will be able to decide whether or not they wish to accept the terms offered by the credit counselling agency. While some creditors may accept once they have more information about your financial situation, they aren’t required to communicate or negotiate with a debt counselling service. If a creditor does not agree with the plan, they are able to continue to contact you to collect on the debt. They are also able to take collection action against you (such as attempting to garnish your wages or having a collection agency contact you) and the credit counselling service has no legal power that will require them to stop. The counsellor can request a stop to these processes, but the creditors do not have to listen.
It’s also worth noting that many debt counselling services receive a percentage of the debt that is paid through a debt management plan. This fact does not necessarily mean that the plan may not be a good idea for you, but it is something that is worth considering.
Also, as mentioned, there are many different credit counselling and debt counselling agencies out there. In addition to the fact that each agency will offer different services and charge different fees, it’s also important to learn about an agency’s qualifications and reputation.
You’ll also want to ask the counsellor about their education and their years of experience.
Another potential downside is that using a debt counselling service and agreeing to a debt management plan will affect your credit rating. While it’s true that just meeting with a counsellor won’t hurt your credit score, if you decide to go ahead with a debt management plan, this will be reported to the credit bureaus and it will affect your credit score. In some cases, it may make sense to proceed with the plan anyway, even if it hurts your credit. This is true in cases where not going ahead with the plan will result in you defaulting on your debts and potentially causing even more harm to your credit report. However, since most debt management plans still require you to pay 100% of the debt that you owe, you will have to think about whether it makes sense to negatively impact your credit score by going ahead with the plan.
Choosing the Right Credit Counselling or Debt Counselling Service
If you decide that you wish to speak with a credit counselling agency, it’s important to choose the right one. Remember, debt counselling services vary drastically depending on the agency you choose.
It’s important to know that credit counsellors are not required to have any specific qualifications. This means that all credit counsellors are not created equal. Some credit counsellors will have specialized training, such as having completed an Insolvency Counsellor’s Qualification Course, offered by the Canadian Association of Insolvency and Restructuring Professionals or have received an Accredited Financial Counsellor Canada designation, which is offered by the Ontario Association of Credit Counselling Services. Before you agree to work with any counselling service, it’s important to understand their qualifications.
Before you agree to work with a debt counselling provider, find out as much as you can about the services they provide, how much they charge, what sort of training and qualifications they have, and much more. You also want to be sure that you’re working with someone you can trust and get along with. If you don’t trust the person or if you don’t agree with their judgement or opinion, it might be best to consider a different credit counselling organization.
Alternatives to Debt Counselling and Credit Counselling
Debt counselling and credit counselling services are among the most commonly-known debt relief options. However, that doesn’t doesn’t necessarily mean they are the right choice for everyone. As mentioned, different people have different financial circumstances and that makes certain options better for certain people than other options.
Debt often feels overwhelming and, when you’re dealing with stacks of bills and calls from creditors, it’s easy to feel like you don’t have anywhere to turn. However, this isn’t the case. No matter what your financial situation may be, there is almost certainly an option available to improve your circumstances for the long-term. Understanding all the different options that are available is the key to finding the right one for you.
For instance, you may be able to get a debt consolidation loan on your own. If you have reasonably good credit, you could get a new loan with a lower interest rate than the overall interest you’re paying on your current debts. You can then use this loan to pay off your debts. The result will be a single payment that will be easier (and possibly less expensive) than paying each creditor separately. For instance, if you owe $5000 on a credit card with a 22% interest rate and $3000 on a card with an 18% interest rate, and you get an $8000 line of credit with a 15% interest rate, you’ll save yourself significant money in interest. However, if you have bad credit, it can be very tough to get a new loan and especially difficult to get a loan with a low enough interest rate to save you any money.
Another option is to speak with your creditors on your own. You do not need to work with a credit counselling agency and agree to a debt management plan to contact your creditors and ask them if there is anything they can do that will make paying off your debt easier. If you call your creditors and explain your financial situation, they may be willing to work with you. This is especially true if you have a long history with the creditor and if you have always paid your debts on time in the past. However, much like a creditor is not required to speak with a debt counselling service, creditors do not have to agree to negotiate with you. They can simply say no and continue to require that you make your payments as initially agreed.
An alternative to working with a debt counselling or credit counselling service is to speak with a Licensed Insolvency Trustee. This is a person who has received specific training and who is licensed by the federal Office of the Superintendent of Bankruptcy to provide information on debt relief options and to administer certain insolvency processes. Most trustees offer a free consultation where they review your financial situation and provide you with details on the debt relief options available to you.
A trustee is required to provide you with details on all available options, not just the ones they administer. This is different from credit counselling agencies and other financial professionals who may only give you details on the options they know best or the ones that work out best for them.
Two processes that trustees are able to administer are consumer proposals and bankruptcy processes.
In a consumer proposal, the trustee will make an offer to your creditors based on what you can afford to repay. One way this differs from a debt management plan is that a consumer proposal often sees you repay only a portion of the debt that is owed. Another difference is that a proposal is a legal process. When the trustee delivers the proposal to your creditors, they are each able to vote on whether they wish to accept it. If the creditors that are owed the majority of the debt agree, then all of your creditors are bound by its terms. Another way a proposal differs from a plan offered by a debt counselling agency is that your unsecured creditors are not able to communicate with you or take any legal action against you to collect on the debts once a consumer proposal has been filed.
This is also true in a bankruptcy. While filing for bankruptcy is often the last resort and an option that is only considered after all other options have been discounted, it can make sense for some people. In a bankruptcy, a debtor’s debts are eliminated and they are allowed to start their financial life fresh. A person who files for bankruptcy pay be required to surrender some assets and/or make monthly payments to the trustee who will distribute them to the creditors. Whether this is required will depend on several factors, including where you live, how much you earn, and the type and value of your assets.
As you can see, there are many options available to those who are struggling with debt. Debt counselling and credit counselling are options that often work for many people, but they are not the only choices out there. Understanding all of your options can help you make the right choice for you.