Debt consolidation credit counseling is an important undertaking. Avoiding bankruptcy and keeping your credit record intact are two keys to financial success. You also need to know how to distinguish a good credit counseling agency from a bad one. There are many good credit counseling agencies out there but some are bad apples. It is important to understand how credit counseling can effect your credit report. Also be aware of a key change to the bankruptcy laws that involve credit counseling.

What is Debt Consolidation Credit Counseling?

Debt consolidation credit counseling agencies provide a service to people who are in over their heads in debt. Credit counseling agencies provide counselors, education, and Debt Management Plans (DMP). A Debt Management Plan is a service where consumers send an agency a lump sum payment which is then distributed to creditors who have agreed to the plan. Creditors sometimes agree to lower interest rates, waive fees, and post updates to credit reports as well. The convenience of making one payment to a single credit counseling agency is also a plus. The problem with Debt Management Plans is they only address unsecured debt. Secured debts such as home loans or auto loans should be prioritized and paid first. You risk losing your home through foreclosure and your car through repossession if you fail to make your payments.

How to Find a Good Debt Consolidation Credit Counseling Agency

A good credit counseling agency is one that offers an in-person consulting in your local area. Services beyond Debt Management Plans including personalized education are also good options to expect. The National Foundation for Credit Counseling (NFCA) and the Association of Independent Consumer Credit Counseling Agencies (AICCCA) are the key industry groups for credit counseling agencies to be members of. Ideally you want a counselor who will give you personal attention and present you with all of your options. You don’t want to feel pressured into a bad decision.

Some Debt Consolidation Credit Counseling is a Scam

With consumer debt at an all time high and federal personal bankruptcy laws requiring credit counseling many aggressive agencies have opened up shop targeting unsuspecting consumers in need. Non-profit credit counseling status does guarantee legitimacy or trustworthiness. In many states non-profit status is a requirement for a debt consolidation credit counseling agency to do business. Another caveat is that some not-for-profit credit counseling agencies are closely aligned with for profit businesses. Some debt consolidation credit counseling agencies charge excessive fees and only push DMPs. Asking good questions and referring to credit counseling agencies on the NFCA and AICCCA lists will help you sort the wheat from the chaff.

How Debt Consolidation Credit Counseling May Effect Your Credit Report

When you enter into a Debt Management Plan creditors will often make updates to your credit report. These updates include “re-aging” accounts and removing delinquent payment references. A potential drawback is that since lending is subjective, lenders may consider the notes your creditors put on your report as a good or bad sign. A good sign would be that you took steps through credit counseling to take care of your debts. A perceived bad sign would be that you had so much debt that it became unmanageable and you may be a credit risk. In the long term this may effect your credit score.

Debt Consolidation Credit Counseling and Personal Bankruptcy

If you decide that personal bankruptcy is the best course of action for your situation, you need to be aware of a key change to the bankruptcy laws. Before you can file for bankruptcy under either Chapter 7 or Chapter 13 you need to know the law. Changes in the Federal bankruptcy laws brought about by the Bankruptcy Act of 2005 require folks to get credit counseling from a federally approved agency six months before they can take advantage of bankruptcy protection.

Credit Counseling can put you on the right track for lifetime success today. Sleep easier at night and rest assured that your financial future is very bright. You have the tools to pick a good credit counselor. Ask a lot of questions and educate yourself. Do it now!

In the forefront is the Christian credit counseling which is making a difference in this field not just by demonstrating genuine intentions but also by offering credit counseling in an affordable way to consumers. It helps consumers take steps to improve their credit.

A consumer credit counseling service has the goal educating debtors of different consolidation ways. Of which the secured debt credit is the one with which you can avoid unnecessary additional clerical costs and also prevent legal actions against you. In short credit counseling is designed to persons who are neck deep in debt.

The Statutory Bindings

If you are looking for information on nonprofit credit counseling agency Christian credit counseling is your natural first choice. Like all nonprofit organizations they have an obligation to educate and counsel the needy people. All nonprofit credit counseling agencies are bound by nonprofit corporation statutes and comply with state charitable solicitation laws. This is why nonprofit credit counseling agencies provide free services or at least charge minimal fees to recover their cost. It helps to keep in mind that appropriate Federal and Senate committees have taken cognizance of the profitable nature of some of the nonprofit credit counseling agencies.

In fact, for more than five decades now, nonprofit credit counseling organizations are helping consumers. Those providing assistance to consumers credit counseling and debt management services must keep your private information confidential. Rules are put in place to limit the fees a nonprofit credit counseling firm charge their clients. Californian licensed nonprofit credit counseling firms must file their financials with the statutory agencies regularly.

However, some community credit counseling services are setting precedence and are taking their services beyond expectations. If you act sensibly you can actually get free counseling and debt consolidation advice from them.

Here Are Some Helpful Steps

List out all community based and nonprofit credit counseling services.
Checkout their accreditations and business histories through their websites and testimonials.
Talk to them before signing any documents.
Don’t leave anything to ambiguity; get their and your obligations in writing.
Take help from The National Foundation for Credit Counseling for researching about some credit counseling organization.
You must always remember, at the back of your mind that, credit counseling is a legal and ethical alternative to file bankruptcy. In any case, credit counseling is a viable option before meeting a bankruptcy attorney. For an industry having more than its share of questionable reputation, at least this is the only way out. In addition, for those consumer credit counseling agencies in the for-profit side of the industry, the problem is that the fees are rather too high and typically take long times to clear off the debt. Ho

When we find ourselves at the helm of a ship drowning in a sea of credit card debt there are organizations that we can turn to, and with a little due diligence and articles such as the one your reading right now can help yo navigate you to safe waters, and get you on the path to financial freedom. Credit counseling is one of those organizations that fall under the “debt solutions” category and out of all the different solutions and organizations that could assist you in time of financial crisis credit counseling will probably give you the most bang for your buck.

It was first established in the 1950′s when creditors created the National Foundation for Credit Counseling or NFCC for the purpose of, according to the W. Patrick Boisclair, Chairman of the NFCC, “the NFCC initially monitored legislative and regulatory activity for its retail credit members” and “also conducted public awareness campaigns on credit.” Their mission statement reflected an objective to help the American consumer avoid bankruptcy and keep them educated on fiscal responsibility. In 1993 another organization was established called the “Independent Consumer Credit Counseling Agencies,” or AICCCA, stating that there was a need for, “industry…standards of excellence and ethical conduct.” In 2005 the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 made counseling a requirement 180 days prior to filing bankruptcy.

So now credit counseling has been such an integral part of financial health when facing the prospect of bankruptcy that now there are approximately 300 organizations that offer credit counseling in the US. Previous to choosing one of these organizations to assist you, let’s get a better grasp on what credit counseling is and how we can benefit from this breakthrough methodologies.

The main goal of credit counseling, if you walk away with anything, would be to educate you on credit card debt, and how you can avoid being swamped underneath a mountain of credit card debt. Another big part of the process is the credit counselor is involved with the negotiation of better terms across your unsecured credit card debt, which translates to lower rates and lower overall debt. Most likely, you will find yourself enrolled in a debt management plan (or DMP).

The DMP

The debt management plan is another huge benefit of enrolling into counseling. A DMP is fairly simple, after your enroll in the DMP, and the credit counselor negotiates lower interest rates you close your accounts, and stop making your monthly payments directly to your creditors and begin paying the agency one payment who will disburse the funds according to the terms of the DMP.

Many counseling agencies tout some significant savings and advertise that they cut your debt by 50%-60% and you will be “debt free’ in little as two years. Realistically the industry average is you will be able to cut your debt by 20% and the DMP usually has a turnaround of about 4 years to be completely free of your debt.

Another benefit of enrolling in a DMP is the lowering of interest rates. The interst rate on a credit card that has been defaulted on is usually in the range of 30% to 50%, after enrolling in a DMP, a seasoned credit counselor can negotiate a lower interest rate where your payments will be a more manageable dollar amount reflecting your income.

Credit Counseling Scams

Unfortunately there are some fly by night credit counseling agencies that are seriously lacking in the ethics department. There are some red flags, or signals, that you should be cognizant of on your search for an agency.

Some of the more obvious red flags are:

They refuse to give any references or contact information to testimonials.
They promise that they can lower your debt in by a ridiculous amount in a ridiculous amount of time.
Poor rating on the BBB or several poor reviews on the internet.

The portion of the Treasury Department’s Making Home Affordable Plan (implemented on March 4, 2009, please see earlier article summarizing this Plan) regarding plan participants with high “back end” debt (defined as other debt in addition to your mortgage debt, such as credit cards.) Homeowners in this category, to receive the benefit of a mortgage modification or refinance, must participate in HUD-approved credit-counseling.

This article pertains to situations where borrowers qualify for the portion of the mortgage modification program or mortgage refinance program for homeowners with high back end debt and therefore must participate in mandatory HUD counseling. This article discusses the qualification requirements for this prong of the mortgage modification program as well as the counseling requirements required under this prong.

Credit Counseling and High Back End Debt

Borrowers with high “back end” debt (housing payment, credit cards, and car payment) will have to undergo mandatory credit-counseling to receive a mortgage modification under the Plan. However, under the loan modification prong of the Plan, there is a specific program available for borrowers with high back end debt. Under the Plan, borrowers with back end debt exceeding 55% of their income could be eligible for a loan modification, if they also participate in a HUD-approved credit counseling program.

Generally, if you have less than 20% equity in your current home and your equity has been reduced as a result market conditions, you are among the target group of homeowners at which the Plain is aimed. If your income has declined or your mortgage payment has increased to more than 31% of your gross income (all income before taxes), you also generally meet the guidelines to receive a temporary, five-year reduction in mortgage payment , as well as significant incentives for successful participation in the program.

To be clear and avoid scams, there are no closing costs or fees of any kind for participating in the mortgage modification program or the refinance program for Fannie and Freddie Mae mortgages. You should, to the extent possible deal directly with your lender and you should be aware of and avoid any kind of scheme where a broker might try to charge you fees to participate in this program.

For example, among other incentives, homeowners qualifying for and participating in the mortgage modification program qualify for an initial cash payment of $1500, as well as a $1,000 reduction applied to the loan principle for five years. For more exact breakdown of the incentives available to borrowers, lenders and servicers under the Plan, please see my prior article detailing the entire plan. For the purpose of this article, I will be focus primarily on the credit counseling requirements.

How the Credit Counseling Will Work

Credit counseling agencies nationwide must certify themselves as HUD counselors and can then provide the required counseling under the Mortgage Modification Plan. The Treasury has issued some general information to credit counselors to begin implementation of the Plan. The following is a breakdown of the information provided to credit counselors thus far. For example, the Treasury advises credit counselors that if they are already working on a modification plan to benefit a borrower, they must now first consider whether modification under the Plan may be more beneficial to the homeowner.

When a credit counselor determines that a homeowner does not qualify for a mortgage modification under the Plan, the counseling agency is supposed to discuss all loss mitigation options, including loan modification scenarios outside the Plan and opportunities to refinance or access to available local resources such as rescue grants and loans. If it is impossible to work out a deal to keep the homeowner in the home, the counseling agency should discuss short sales and deeds in lieu of foreclosure as ways to help a borrower transition to more affordable housing.

Treasury advises credit counselors that one of the important components of the Making Home Affordable program is community stabilization. Treasury views short sales and deeds in lieu of foreclosure as options that minimize the impact of vacant and abandoned propertied on communities. Counseling agencies are presumably required to inform participating loan servicers that they could be eligible for an incentive of $500 and can make reimbursable payment of up to $1000 to extinguish other liens. Borrowers in this situation are eligible for a payment of $1500 in relocation expenses in order to effectuate short sales and deeds-in-lieu of foreclosure.

Although all delinquent borrowers are encouraged to seek the advice of a HUD-approved counselor, only borrowers with a back-end debt-to-income ratio at or above 55% must certify that they will participate in counseling as a condition of a modification under the Making Home Affordable Program.

Level of Counseling

Borrowers required to participate in mandatory credit counseling must agree to meet with a counselor from a HUD-approved housing counseling agency or a National Foreclosure Mitigation Counseling Program (or NFMC, was launched in December 2007 with funds appropriated by Congress to increase the availability of foreclosure counseling services across the country) participating agency to create an action plan that includes steps and a time line to eliminate unnecessary debt, minimize expenses, increase income and create savings. The action plan requires the borrower to establish a follow-up schedule with the counselor. The program generally requires that the borrower have two mandatory sessions with a HUD-certified credit counselor.

Counseling Referrals

The Treasury allows a credit counselors to make referrals to specific servicers if the borrow contacts the credit counseling agency and it is determined that the borrower may be eligible for a Home Affordable Modification, the counselor must work with the borrower to submit an intake package to the servicer. To be eligible for compensation, the counseling must conform to Level 3 counseling requirements, as established by the National Foreclosure Mitigation Counseling (NFMC) Program, including some additional requirements detailed in the counseling protocol on the NFMC website.

Counseling Fees

NFCM Program funds and HUD Housing Counseling Grant funds can be used to pay counseling agencies for counseling provided to borrowers with back-end debt-to-income ratios greater than 55% and for counseling borrowers who are referred to servicers. TARP funds cannot be used to pay for housing counseling. Because the loan modification program is supported by TARP funds, there are no direct financial provisions for fees to be paid by the Making Home Affordable program to counselors.

NFMC Program reimbursement for the required counseling will be set at a new Level 4 fixed price pending available resources. Other counseling will be reimbursed at the current fixed price for Level 3 counseling as established in each organization’s existing NFMC Program grant agreement. HUD Housing Counseling grant recipients may request reimbursement for the actual, document cost of counseling up to the amount available under the grantee’s counseling award. If a portion of the counseling has been reimbursed by NFMC, HUD Housing Counseling grant recipients may bill against their HUD Counseling grant actual costs not covered by the fixed price NFMC reimbursement, up to the amount available under the grantee’s counseling award.

Counseling agencies that do not receive NFCM Program funding or HUD housing counseling grant funding are encouraged to provide counseling through other funding sources. For example, servicers can pay for this counseling. If a housing counseling agency participating in HUD’s Housing Counseling Program or the NFMC Program does not have sufficient resources, they are not required to provide this counseling, but must make a reasonable effort to refer borrowers to counseling agencies that can assist them.

Conclusion

Under Obama’s new Making Home Affordable Act, potential Plan participants with high “back end” debt, will be required to undergo HUD-certified credit counseling as a condition of their participation in the program.

This article was written using only government HUD and Treasury documents. All analysis is original to this author.

Jim Tily is a legal researcher specializing in real estate law.

Currently, there is a widespread lack of information and confusion regarding the prog