Credit Counseling: Is This a Good Way to Get Out of Debt?

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Credit Counseling

Almost every single person in this country is in debt. Many people aren’t even American citizens that owe some form of debt in this country. With Coronavirus causing more people to live off of borrowed money, consumer debt is well over $14 Trillion (with a T!)

Some people can pay this debt off properly. Some people struggle, but they manage to get by. But what about people who cannot pay their debts at all? Well, for them, there are a few options.

Options for When You Can’t Pay Debt

So what exactly are you supposed to do when you simply cannot pay your debts? Well, the first thing you can do is realize that you’re not alone. Millions of Americans are struggling to pay their debts.

The important thing is that you’re actually making an effort by doing research to see what your options are.

Don’t Ignore Your Debts!

One of the worst things you can do is completely ignore your debts altogether. In many instances, ignoring your debts is infinitely worse than filing for bankruptcy. (No, seriously!)

A single missed payment can drop your credit score 50-100+ points. Ignoring debts can get your car repossessed or your house foreclosed on. Ignoring debts is a great way to ensure that the next 7-10 years of your life will be an absolute mess!

What About Bankruptcy?

This is a last-measure, last option for people who have found themselves on tough times. Depending on what kind of bankruptcy you file, you may end up having someone selling all of your assets to pay your lender!

Filing for bankruptcy is sometimes better than debt settlement and often better than just running away and ignoring your debts.

Debt Settlement should also be a last resort. Whenever you settle a debt, you and the creditor agree to a lump-sum payment that’s less than what you currently owe. A settled debt payment can sometimes look even worse than bankruptcy on your credit history.

Credit Counseling

Credit counseling services are almost always nonprofit, and they ever staff trained and certified professionals. These professionals will sit down with people that are overwhelmed with debt and help them come up with an attack plan.

They first start by getting an overview of all of your debts. They then help you come up with a game plan for reaching these debts taken care of. Sometimes credit counseling services will use debt restructuring or debt consolidation tactics.

Once they have helped you come up with a way to pay these debts off, and have possibly restructured your debts for you, they will then work with you to attack the root cause of your debt.

This is to prevent you from going into debt again in the future.

Now, I just want to give you a heads up.. Don’t assume nonprofit means free. Many of these credit counseling agencies are not for profit, but they still may charge you for their time. However, if you’re drowning in debt, it may be worth it.

The National Foundation for Credit Counseling is probably the most popular non-profit credit counseling agency in the country. They usually help people get entirely out of debt in 2-5 years.

What Can We Learn from Credit Counseling?

These credit counseling agencies almost always follow the same game plan. So, is this a game plan that we can learn from? Absolutely!

1. Make A List Of Debts / Assets Before Credit Counseling

The first thing that credit counseling agencies will do is have you make a list of all of your debts and assets. You need to make a list of every single penny that you owe, and you need to make a list of all of your liquid assets:

  • Checking accounts
  • Savings accounts
  • CDs, 401Ks, IRAs
  • Investments
  • Home Equity

I recommend using Personal Capital for this part. They will sync up with all of your accounts to help you make a list of everything.

2. Credit Counseling and Debt Payoff Strategy

Next, the credit counseling agencies will help you come up with a strategy to pay off your debt. Lucky for you, I’ve already written a great guide that outlines the best strategies for paying off debt.

They typically like to use the Debt Snowball or Debt Avalanche methods which I’ve outlined in my debt guide that’s been linked above.

Credit Counseling

3. Debt Consolidation / Restructuring

As part of the debt payoff strategy, they may end up suggesting you consolidate or restructure your debt. Whenever you combine or restructure your debts, you are rolling all of these debts into one single loan.

For example, if you owe $10,000 to 3 different credit card companies, you could go to the bank and get a $10,000 loan out. You then use that loan to pay off your credit cards. Now, rather than owing money to 3 different credit card companies, you only owe the bank that one fixed-rate monthly payment

4. Prevent Further Debt

The final thing that a credit counseling agency will do for you is to help you avoid going into debt in the future. They may work with you on your spending habits, and they may help you come up with a high budget, they may do a lot of things.

Every single person is different!

Monitoring Your Credit Is Important!

Every single person who goes through credit counseling will be told that they need to monitor their credit reports regularly. It’s the right motivation for staying out of debt, and it’s an excellent way to prevent fraud and theft.

It’s also super easy to do!

I recommend using Credit Karma or Credit Sesame. Both of these services will monitor your credit and notify you if anything changes. If you’ve missed a bill, then you will get an email from them. If someone has tried to apply for a loan in your name, you will get an email from them.

Now that you know how the credit counseling agencies work, you can get to work on yourself!

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