There are good and bad credit counselors; learn to tell between them

The Bankruptcy Abuse and Consumer Protection Act, enacted last year, had the unprecedented requirement that anyone filing for debt relief through bankruptcy must first enroll in a credit counseling program. The notion was laudable, at least in concept - debtors without any formal financial training could learn about handling money and perhaps avoid bankruptcy. It hasn’t worked out that way; most people who seek counseling have found it necessary to file for bankruptcy, anyway.

This requirement has created a bit of a stampede as debtors head for credit counseling agencies. It has also, unfortunately, created a pretty lucrative business for those who wish to engage in counseling and taking advantage of people. The Internal Revenue service has recently revoked the tax exempt status of dozens of agencies that were found to be taking advantage of their clients, usually by enrolling them in expensive debt repayment plans that may or may not have been in the customers’ best interests.

So how can you choose a credit counselor? How can you be sure of getting someone who will help you rather than hurt you?

Here are some signs that may suggest that the agency is not working to help you:

• They promise “lower payments.” They can’t lower payments per se; they can only arrange to lower the interest rate. That may yield a somewhat lower payment, but promises of “cutting your payments in half” are pipe dreams. Don’t fall for it.
• Suggest that you will save money because they are “nonprofit.” While the new bankruptcy law requires that all agencies be nonprofit, there is no inherent benefit to a nonprofit agency. They may or may not help you; the fact that they are “nonprofit” has nothing to do with it.
• They suggest that you include your student loans in your debts. Student loans are not negotiable, nor may they be wiped out through bankruptcy.
• Offer only ballpark figures regarding how your debts will be handled instead of specific figures for each of your creditors.
• They ask for money before they perform any services or pressure you to offer what they call “voluntary contributions.”

Any company offering any of the above should be treated with suspicion. You may wish to check with your local chapter of the Better Business Bureau or Chamber of Commerce to see if anyone has filed any complaints about them. You might also do an Internet search to see if you can find any information about how they have treated past customers.

The Internal Revenue Service does have some information about some of the companies which have had their tax-exempt status revoked at their Website. You could check there. It also wouldn’t hurt to talk to other people you know to see if they have had any experiences with the company in question.

The last thing you want if you are about to file for bankruptcy is to deal with a credit counseling agency that will make your financial situation worse.

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