Nathan Rabin is a great writer who has published several books about pop culture. Among other things, he is the co-author of Weird Al Yankovic’s biography, Weird Al: The Book
. He also got himself in a mess of financial trouble that only got worse when he signed up with a less-than-reputable debt counseling service.
A good debt counseling service can make a tough situation easier. It won’t work magic, and you may be able to do much of the work by yourself for free. A bad debt counseling service will make your situation worse.
Before making any calls, see what can you do with what you have. Set up a list – a spreadsheet, if you can – with the names of the lenders, the total amounts owed, the annual interest rates and the minimum payments. Add up the total minimum payments. Can you find room in your budget to meet the minimum payments, add a little extra to the obligation with the highest interest rate, and still pay the rest of your bills?
If so, you don’t need a credit counseling service. Call up each of those creditors and ask if they can reduce your interest rate. Some may, allowing you a little extra room to pay off the charges, and making the payoff process easier. As you make payments, keep the spreadsheet updated so that you can track your progress.
If you can’t make the minimum payments, then you have a more work to do, but your spreadsheet can help. You can call the creditors yourself, tell them that you are having trouble making the minimum payment and are considering bankruptcy or restructuring, but you want to know if they can do something to help you. They may be willing to cut a deal with you that would help them get more money and help you limit the damage to your credit rating.
If that doesn’t work, you need to go the next step. That’s dealing with a debt management service. This industry is a tricky one, though – some groups offering assistance are wonderful, and others will charge you a lot of fees without doing much. They take advantage of fear and desperation. You’re so happy to talk to someone who reassures you that your situation can be solved that you don’t ask enough questions.
That’s not good.
The best firms tend to be nonprofit organizations that offer educational programs to help you make up a budget and financial plan. (Not all nonprofits are good ones, though. One hint: A service that advertises heavily on TV probably isn’t a good one.) They will listen to your situation and discuss their services before they make you sign up for anything. The Federal Trade Commission has a great guide covering the ins and outs of credit counseling.
In general, the debt management company works out deals with your creditors, then sets a monthly payment that you will be expected to make directly to the debt management company for a few years. It will then use those funds to pay off the creditors under the plan that it negotiated with them. The payment may not necessarily be easy for you to make, at least at first, but it will be enough that you can make real progress on your financial situation. Participation in a credit counseling plan should not affect your credit rating (although the problems that led you to credit counseling may).
Within that basic framework, though, different credit counseling firms work differently. Some have you pay them, but don’t negotiate a payment plan right away. They hold your payments on account, figuring that the creditors will be more anxious to negotiate a plan once a few payments are missed. This may do more damage to your credit rating. Some creditors will start legal action against you while they are waiting. These programs are often known as debt settlement, rather than debt management, and they are the source of most of the complaints that people have about the industry.
Before you agree to a debt management plan, make sure you have all the fees in writing and know exactly what the company is going to do for you. The FTC has a big list of questions you should ask, starting with whether debt management really is the best option. A good credit counseling company offers services beyond debt management, including help with budgeting.
Debt management plans are not fun, but they are better than dealing with the pressure of debt and better for your credit rating than bankruptcy. If you’re smart about how you use one, you can avoid being another sad story.
