Saundra Latham writes a good review of the best credit counseling agencies of 2018 in The SimpleDollar website.  She correctly points out that the best credit counseling firms to handle a Debt Management Plan are:

Generally speaking, if you are signing up for a Debt Management Plan to consolidate your debts into a payment plan managed by a certified credit counselor that provides lower interest rates and financial counseling, you want to go with an agency certified by the National Foundation for Credit Counseling (NFCC).  The NFCC has the toughest certification standards in the credit counseling industry and it is simply unwise to go with an agency not certified by them.

What is lacking in Latham’s review,  however, is any statement of whether these plans actually work. Does credit counseling actually work? Do creditors really accept these plans and what is the success rate?

The one big benefit of credit counseling.

There is basically one major benefit of credit counseling programs–they get credit card companies to reduce the interest rate.  That’s the big trick.  If you can pay back debt at 5% to 10% versus 20% to 30% on credit cards, you pay back the debt faster and with fewer dollars.  Yes, credit counseling agencies go through a dog and pony show of reviewing your monthly budget and making suggestions like using coupons to shop, etc, but that is all for show.  To be honest, there isn’t a whole lot of real counseling in credit counseling agencies.  The name of the credit counseling game is to enroll new customers into a payment plan.  That’s how they make their money.  The counseling is generally lame, but the interest rate reductions are real and powerful.

But do these plans work?  Generally no.  Most credit counseling programs fail.  The success rate is about 25% to 40%. Cambridge Credit Counseling, Green Path and Incharge Debt Solutions are recommend because their success rates tend to be higher, around 40%.  But that still means that 60% to 75% of the plans fail. Would you agree to a surgery if the doctor told you that the survival rate was only 25%?

Credit counseling is a partial solution–it only handles some of the debt. A partial solution is really no solution at all.

Why do credit counseling plans fail?

Credit counseling plans fail for a lot of reasons. First, most folks cannot afford the payment even though the interest rates are lower. Second, there is no flexibility to the payment.  If you miss a single payment the entire program crashes and you must start over. Third, many creditors and most collection agencies refuse to participate in the plan. That means that some of your debts are paid in the plan but others continue to sue and garnish wages thus causing the plans to fail. Credit counseling is a partial solution–it only handles some of the debt. A partial solution is really no solution at all.  So, credit counseling generally works well for folks who mainly have credit card debt and where their basic problem is overspending and lack of budgeting, but credit counseling does not work well for folks whose general problem is that they lack sufficient income and their debts tend to be more collection agency debts instead of mainline credit card debt.  Credit counseling programs just are not equipped to handle garnishments, junk debt buyer lawsuits and local collection agencies.

Credit counselors need to acknowledge that their signature offering — the debt management plan — doesn’t work for everyone.”  Liz Weston

Even financial guru Liz Weston has written that there is a lack of real counseling going in in the credit counseling industry.  (See Do Debt Management Plans Work?)  According to Weston, too many folks are enrolled in debt management plans without even suggesting that bankruptcy might be a better option. Those credit counselors are suppose to be providing professional counseling advice, but Weston rightfully criticizes the industry as emphasizing profits over people.

The bankruptcy option.

The Bankruptcy Reform Act of 2005 required that every person filing bankruptcy take a credit counseling course before their case could be filed. The idea was that a lot of people would chose not to file bankruptcy if they could just speak with a credit counselor about payment options first. That idea proved to be wrong, terribly wrong. I have not met a single person who decided not to file bankruptcy after taking the required credit counseling  course–not one single person in the thousands of people I have represented since 2005.

But what if those folks deciding to enter credit counseling had to visit with a bankruptcy attorney first? I wonder how many would chose to file bankruptcy instead? What if a people really had ALL their options explained, not just some of them? I would guess that upwards to 40% to 50% of those entering debt management programs (and probably 80% of those entering debt settlement programs) would opt to file bankruptcy if they had the opportunity to compare the programs side by side.

What consumers lack is access to independent debt counseling professionals whose income is not dependent on the type of debt solution they recommend.

People in financial turmoil are lost. It has become impossible for consumers to figure out who is genuinely an an honest credit counselor from those who are wolves in sheep clothing pretending to be nonprofit counselors. Even the real credit counselors are trying to fatten their revenues by enrolling customers into payment plans when it is perfectly obvious that they would be much better off in the long run by declaring bankruptcy.  What consumers lack is access to independent debt counseling professionals whose income is not dependent on the type of debt solution they recommend. And going forward, that is the type of consumer law firm we are trying to become. More on that later.

Image courtesy of Flickr and GotCredit.