What is debt counseling?

Debt counseling services can help you manage your debts. They might do things like help you examine your spending habits and understand how to create and follow a budget.  They may also recommend that you enroll in a debt management plan (DMP). In a DMP, the counseling service will work directly with your creditors to come up with a payment plan for you. A DMP requires you to make timely payments according to the payment plan.  

Debt counselors meet with you in person, online, or over the phone.  They may also offer free educational materials. These can help you manage your personal finances on your own.

Avoiding scams

It might sound good to have someone help you get out of debt. But you need to be cautious when considering working with a debt counselor. It can be hard to figure out whether a debt counseling service is legitimate or a scam.  Most reputable debt counseling services are non-profits, but a service isn’t necessarily reputable just because it’s non-profit.

Some services are owned by the creditors themselves. So make sure you understand who owns the service and who you’re working with. And there is no standard, nationwide licensing or certification system for debt counselors. So don’t presume a “licensed” or “certified” debt counselor is an expert who will help you. That word might mean that the counselor is trained and knowledgeable about credit, debt, and money management. But it might not mean anything at all.

Instead, do as much research as you can before deciding whether to work with a debt counseling service, and be prepared to ask questions. 

The Federal Trade Commission has a information on its website about debt counseling services. This includes how to decide whether to work with one. 

Before you work with a debt counseling service, check it out with the Better Business Bureau. Also check a local consumer protection agency. If you see a lot of complaints about a company, that can be a warning sign. Check with the Illinois Secretary of State  and the Illinois Department of Financial Institutions to make sure that the service is registered and operating lawfully. You may also find the Federal Trade Commission’s guide on choosing a credit counselor helpful in making the right decision.

Beware of “debt elimination” schemes.  These schemes prey upon vulnerable people feeling overwhelmed by their debts. They may tell you that they can show you how to get rid of your debts entirely, without making any payments. This usually involves giving you a form letter to send to your creditors that states that they never had the right to lend you the money you owe.  These lengthy form letters make phony claims, such as that banks are not legally authorized to make loans. Claims like that are not true.  These schemes can’t erase your debt, and they can steal your money. The FTC has information about these schemes on their website as well.

You can help avoid scams by asking an organization the right questions. Make sure to get clear answers on the services offered, when you should see results, and how much you will have to pay. Do not deal with a debt counseling service that:

• Advertises complete debt relief
• Claims to remove something from your credit file forever
• Insists you pay fees before it provides services
• Refuses to provide free, general information about its services
• Urges you to make “voluntary” contributions to the organization
• Promises things verbally, without ever stating them in writing
• Instructs you to give false information on your credit report or loan applications
• Pays its employees based on whether you sign up for its services
• States that it can create a “new credit identity” for you