Is Debt Counseling Right for You?

Debt counseling can help those who have no other options, but there are risks involved.

There are lots of ways to take chances in life. You could buy a lotto ticket, go rock-climbing, or enter a poker tournament. One thing you shouldn't do, though, is gamble with debt counseling when the risks don't outweigh the rewards.

The debt counseling solution

Debt counseling can offer different solutions, but it's commonly supposed to work like this:

• The agency collects money from the borrower and disburses that money to the various creditors.
• The agency keeps a portion of the money it collects to cover the cost of its services.
• It then negotiates with lenders for reductions in the amount owed and/or interest rate charged.
• The borrower pays off all debts by making fixed payments to the agency for no more than five years.
• Creditors may report negative comments to the credit bureaus based on the borrower's participation in counseling.

Avoid the schemers

Sadly, the debt counseling industry is overrun with schemes and cons. While there are many legitimate service providers, too many debtors get ripped off every year by financial predators who feast on those who owe money to creditors. The latest trend in the industry indicates that the problem could get even worse: Some debt counseling agencies are using the promise of measurably lower debt costs to push their services on borrowers whose debt level isn't unmanageable.

An illegitimate counseling agency may charge upfront fees, or make big promises, about how effortless the repayment process can be. Some agencies have taken money and disappeared, while others contract with borrowers and fail to fulfill those big promises. Working with the wrong counseling agency can raise the borrower's debt costs, and significantly lengthen the payoff period. Because of these dangers, and the potential for negative credit score consequences, debtors are advised to avoid debt counseling unless they really need it.

Warning signs

Signs that a debtor may truly need debt counseling include:

• Being unable to meet minimum payments
• Frequently missing payments
• Receiving excessive calls from creditors and collection agencies

Borrowers who can make their minimum payments generally don't need credit counseling. If they feel frustrated with the slow going of debt pay-down, there are more appropriate options available. These include negotiated interest rate reductions, and debt consolidation. Creditors may be willing to reduce a borrower's interest rate upon request, simply to avoid losing that customer relationship. If that doesn't work, a properly structured debt consolidation loan can lower overall interest costs and the monthly payment burden.

If you're losing sleep, stressed out, and at wit's end, try debt counseling. Look for a counselor who's honest and upfront about your options and the fees they charge. Stay away from those who are unrealistically optimistic. If you just need to reduce your debt costs, look into other options-don't take the chance of making things worse.