(The shocking, whole-truth Credit Counselors don’t want You to know)
You’re deeply in debt, wondering which way to turn. You’re confused, worried, and so stressed out you can’t think straight. What do you do?
Many people mistakenly turn to credit counselors. (more…)
Back in the 50’s, the credit card industry got together to come up with a plan to cope with all of the people filing record numbers of bankruptcies. They were getting stiffed left and right, and they came up with Credit Counseling. After creating the idea, they lobbied to Congress to get the non-profit status for Consumer Credit Counseling (also known as Debt Consolidation, Debt Management Plans, etc.)
Thus Credit Counseling is an option that exists today. It was deregulated a little over a decade ago and now you’ve got private companies, non-profit, and for-profit companies popping up all over. They are subsidized by the credit card companies themselves so they’ve got some pretty good advertising power out there. You’ll see commercials, billboards, and ads all over the internet.
And what is Credit Counseling? Credit Counseling is a program that you enroll into where you can get your interest rates reduced and lowered. Any Credit Counselor can reach basically the same agreements with creditors to reduce interest rates for folks that are enrolled into the program to a certain amount (that amount usually averages to about ten to twelve percent). So, if you have interest rates that are over ten to twelve percent then you could save money by enrolling in Credit Counseling.
Let’s say you have $40,000 in credit card debt like my average client does, and you’re paying 20% in interest, looking at a long road of 60 to 70 years to pay it off with minimum payments (eventually paying back two to three times what you owe with the interest on top.)
Credit Counseling is a much more attractive option. You’re only going to pay back about 50% of what you owe in interest. So you’re looking at a total cost of about $60,000 instead of a couple hundred grand or more. Instead of 60 years or more to get out of debt, Credit Counseling is usually going to be somewhere between four to seven years. Your payments are typically about the same as your minimum monthly payments are now (depending on if you’re making high payments or low payments relative to your debt amount.)
So – Credit Counseling: You reduce the interest that you’re paying. Now, if you’re paying interest below ten to twelve percent on average, then Credit Counseling is probably not going to be of any benefit to you. Another thing about Credit Counseling is that you do pay back 100 percent of your balance. Those are the main economic factors.
Again, this option was created by the credit card industry because they wanted a way to get their share of money from people before they filed bankruptcy. This is why lenders refer to Credit Counseling as a ‘Walking Bankruptcy”
It was designed because they noticed when most people were having problems they would usually pay off one creditor, then file bankruptcy and stiff the rest. Instead, they wanted to enroll people into this program where one payment would be distributed to all the creditors evenly. Every creditor wins and gets more money in case the program fails and bankruptcy ensues.
From the money that is collected through Credit Counseling on behalf of the creditors, the creditors give the Credit Counseling agency a kick back known as “Fair Share”. If you look at the big picture, you’ll find it’s not actually a non-profit set up; somebody’s making a whole bunch of profit! 10-12% interest on average is a great return on investment. And that’s what these Credit Card Companies are getting through these programs.
One thing that we’ve seen in the past year or two is a big crack down on the non-profit status of Credit Counseling agencies. The IRS around a year ago revoked forty percent of all Credit Counselors non-profit status. There’s somewhere around 88 new audits; they’re doing an investigation on the whole industry; and from my perspective it’s pretty much crumbling away.
Why? A couple of reasons:
One is they solicit donations, they go under the banner of being a non-profit, but in all reality they are making a ton of money and it’s just not true.
Another half truth or lie that I see from the Credit Counseling industry and the credit bureaus is with your credit; if you go to the credit bureaus’ websites, or if you ask a Credit Counselor they’ll often say Credit Counseling will not affect your credit rating. This is true, your score will remain intact but all accounts enrolled in credit counseling will be marked as such on your credit report. This looks to lenders like you’ve gotten to a point of debt that was un-manageable and you’re close to bankruptcy if you fail in your Credit Counseling program.
Again, back to the difference between credit rating and credit worthiness, Credit Counseling has a huge negative impact on your credit worthiness. It’s like a big red ‘X’ on top of your three legged stool and it lasts for as long as you’re in the program, usually between four to seven years.
Credit Counseling may be a good option for you because you can get out of debt much quicker than minimum payments and you can save a lot of money with reduced interest rates. You definitely need to get into a good program, and work with a good Credit Counselor, a for-profit company.
So, don’t be fooled. Make sure you keep all of these factors in mind when making your choice on how to deal with your debt.
Often times Credit Counseling is the best option for people if they do not qualify for anything else, or they don’t have a way to simply pay off their debt.
Credit Counseling (Free Counseling & Quotes)
NOTE: This consultation is NOT with Jesse, but with a debt counselor who’s accountable to Jesse.
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Thank you for the opportunity to serve you!
Here To Be An Asset To You,
Jesse Niesen
DebtGoToGuy.com
Traditionally, if you’re not able to make minimum payments, you’re in a hardship, or you just find yourself in too much debt, what you do is file bankruptcy.
You file bankruptcy and you pay zero. The creditors get nothing and it’s the ultimate move, the ultimate trump card that you’ve got as a citizen. Unfortunately, about a year-and-a-half ago Congress passed new laws, which made it extremely difficult to file for what’s called Chapter 7 bankruptcy.
Let’s talk about the difference real quick.
There are two types of bankruptcy for personal bankruptcy filing. I’m not a bankruptcy attorney, I’m not an attorney at all, so this is purely educational information. This is not any kind of legal advice. (If you want to talk to a bankruptcy attorney, I do have a close network of bankruptcy attorneys nationwide. I would be more than happy to refer you to somebody in your state/area. Just contact me, and I’ll get you in touch with them. They can answer any specific questions.)
As a basic overview, Chapter 7 bankruptcy is called liquidation, where they wipe out the debt completely. Chapter 7 is the type of bankruptcy these new laws affected and they have made it much more difficult to qualify. Chapter 13 bankruptcies, on the other hand, are called a repayment plan. This is where you pay back a portion of the debt, usually over about 60 months. During that time, you are making court-ordered payments and you have to go before the judge.
Let me break it down for you this way: Chapter 7 bankruptcies are a pretty good deal, if you need to do it, it’s a good way to go if you can qualify. I don’t see Chapter 13 bankruptcies really being in the best interests of anyone.
Unfortunately, some people have been tricked or fooled into filing Chapter 13 bankruptcies. So far, I haven’t seen it come out as the best option for most. This is why:
If you don’t make it, you’re done! There’s no forgiveness, there’s no helping. You go through tough times! If you don’t make that payment, the Chapter 13 bankruptcy is over.
It’s also going to stick on your credit for seven years as a bankruptcy, which is one of the worst things you can possibly have on your credit report. It stays around for seven years after your payment plan is over. If it’s a five year payment plan, you’ve got 12 years of bad credit from that bankruptcy.
A Chapter 7 bankruptcy shows on your credit for ten years, but its usually completed within a few months. You’ve now got ten years that the Chapter 7 is going to be on your report, which is going to hurt your payment history. It will however, improve the other areas of your credit by wiping out your debt and optimizing your debt-to-income ratio and your debt to credit limit ratio. It eliminates those problems, whereas a Chapter 13 bankruptcy really cripples your payment history. Plus, with Chapter 13, you still owe a good portion of your original debt with payments over a long period of time so your debt-to-income ratio is not much better than before the bankruptcy.
You have to make the payment the judge sets, and it’s the maximum amount you can possibly pay, which is usually quite high. You’re not left with much to live on, and you don’t really have any say in the matter. Of course, it’s also not wiping out the utilization fees until it’s all over years and years from now.
If you can qualify for Chapter 7, it might be a good choice for you if it’s the way you want to go. If you can only qualify for Chapter 13, my advice is to run! Give me a call. We can talk, see if there’s another option. I haven’t seen Chapter 13 work out well for most people. Usually, they make the decision to enter into it out of ignorance or bad advice.
Let’s look at Nicole, a client I worked with in Virginia. She’s in her early thirties and has a 20-month-old daughter. She had $53,000 in credit card debt. She and her husband had some challenges over the past few years with employment and steady income, so they fell behind. She used to have perfect credit. All the debt is in her name and once she fell behind the interest rates jumped up, the payments jumped up.
It started snowballing, she couldn’t keep up and so she went to see a credit counselor. Credit counselors put together a plan and gave her a payment. It was approximately $1,400 dollars a month for five years, and they said with a straight face: “Can you afford to live on negative 87 dollars a month?” And they were serious.
They actually started that program with credit counseling and dropped out after a couple of months because they simply couldn’t afford the payments. If you can’t afford your current minimum payments, it’s kind of tough to afford something as much or more which is usually the case with credit counseling. But, once she dropped out she went to go see a bankruptcy attorney, and she asked if she would qualify for Chapter 7. The bankruptcy attorney said: “Well, we will get you qualified for bankruptcy, no problem.”
She didn’t qualify for Chapter 7 bankruptcy. So here is a woman who has a job, makes $27,000 a year income, does not own a home, has $53,000 in credit card debt, and she still doesn’t qualify for Chapter 7 bankruptcy.
Very few people qualify for Chapter 7 bankruptcy since these new laws were passed. You’ve got to be in a pretty tough situation. The best phrase I’ve heard to describe the new laws are that they are “very creditor friendly.” It’s too bad, because it really hurts the people that need the bankruptcy protection from Chapter 7. Unfortunately, a lot of people are getting dropped into the Chapter 13 category instead. There is usually a better option available. They just don’t know about it.
Was this valuable to you? Feedback? Question(s)?
Please share your thoughts and ideas below. I respond to any questions posted as a comment in detail by email.
Thank you for the opportunity to serve you!
Here To Be An Asset To You,
Jesse Niesen
In fact, if the following six criteria are not met, don’t even get your hopes up, just turn tail and run the other way! (more…)