Why You Should Not Rely On A Debt Management Plan Or Credit Counseling To Protect Your Credit.

Marshall Loeb just posted a blog on Marketwatch.com, Why you might need a credit counselor. Mr. Loeb believes that folks in debt trouble need to run to a credit counselor. While I believe that in a few instances credit counseling might help with repayment of debt, Mr. Loeb’s advice urges folks to seek credit counseling as a way to protect their credit rating.

I have clients who have attempted, without success, various credit counseling/debt management programs (DMPs). Why without success? Because all it takes is ONE creditor to not accept the arrangement that the debt management company/credit counseling company proposes. If that ONE creditor sues and a judgment is obtained, the debtor’s paychecks can be garnished and, in Oregon, 25% of the debtor’s income can be seized to pay that one creditor. The debtors are already in a tight budget set up by the DMP and the arrangement is now “kaput” with that 25% gone to one creditor.

Mr. Loeb also believes that being in a DMP helps with a credit rating. The DMP doesn’t immediately start paying the creditors (depending on the program) and late payments start racking up on the credit reports. I have seen no documentation that being in a DMP assists with the calculation of a debtor’s credit score. On the contrary, all the research I have seen demonstrates that late payments hurt your score more than anything. And I have had clients immediately after bankruptcy with a credit score of 690/709/720 (I believe this unusual result is because those clients filed before any of their payments were late).

Lastly, most DMPs are expensive. Several of my clients have paid thousands of dollars over a year to the DMP and those payments just “vanished” as administrative fees. The payments to the creditors were small and less than the late fees each month. And ultimately, those folks ended up at my office, seeking bankruptcy protection in order to feed their families or pay their mortgages, with creditors hounding them by telephone, lawsuit or personal visit.

Some might argue–oh, she is a bankruptcy attorney, what else is she going to suggest but bankruptcy? There are quite a few clients that I do send to a non-profit credit counseling agency after my consultation with them. For those clients, I see a way out and the debts are not so high that it would take years to pay the creditors. My recommendations to go see a non-profit credit counseling agency are based on the bad experiences my clients have had with the ones who advertise nationally.

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