Credit counseling

What It Means

Credit counseling is help from a trained counselor who reviews your income, spending and debtsLiabilitiesDebts and other money you owe, such as a mortgage, a car loan or a credit card balance. Your assets minus your liabilities is your net worth. See more and walks through your options. The Consumer Financial Protection Bureau (CFPB) says the organizations that offer it are usually nonprofit and usually provide free educational materials and workshops, though they may charge for some services. A counselor may suggest a budgetBudgetA plan for a set period, usually a month, that lists the money you expect to receive and how you'll spend or save it. See more, a debt management planDebt management planA repayment plan set up by a credit counseling organization: you make one monthly payment to it, and it pays your creditors, often at lower rates. See more or another route. BankruptcyBankruptcyA federal court process for people and businesses that can't pay their debts, ending in a discharge of many debts after an asset sale or a repayment plan. See more law also uses the term: anyone filing must first complete a credit counseling session from an approved agency.

How People Say It

• "I finally called a credit counselor about the cards."
• "The counselor went through our whole budget line by line."
• "You have to do the credit counseling course before you can file."

The Breakdown

A short example. Dana owes $18,000 across five credit cards and is only making minimums. She searches online and calls the first "debt relief" number she sees, which promises to cut her balances in half for a fee paid up front.

Where it goes wrong. The company isn't a credit counselor at all; it sells debt settlementDebt settlementPaying a creditor a lump sum that's less than the full balance, often through a for-profit company, in exchange for the creditor treating the debt as resolved. See more and wants money before doing anything, which the FTC flags as a warning sign. Dana hangs up and starts again with the FTC's list: the National Foundation for Credit Counseling and the Financial Counseling Association of America. Her new counselor spends an hour on her budget, shows her what a debt management plan would cost each month, and gives her the fees in writing. She also learns what the plan would mean for her cards and her credit reportCredit reportA record of how you've borrowed and repaid, kept by credit bureaus and sold to lenders, landlords, insurers and others who decide whether to deal with you. See more before agreeing.

What to watch for

• A counselor who pushes a debt management plan as the only option before looking at your finances.
• Any fee before a debt is settled or a plan is in place.
• Vague answers on cost. Nonprofit status doesn't mean free; ask for the price in writing.
• For bankruptcy, a certificate from a provider the U.S. Trustee Program didn't approve, which won't satisfy the court.

Good to Know

Bankruptcy has its own counseling rules. U.S. Courts explains that an individual must complete credit counseling from an agency approved by the U.S. Trustee Program within 180 days before filing, in person, by phone or online. After filing, a separate debtor education course on managing money is required before debts can be discharged. In Alabama and North Carolina, Bankruptcy Administrators approve the providers instead. The U.S. Trustee Program publishes the lists of approved providers.

Related Terms and Categories

• Debt management plan

  A repayment plan set up by a credit counseling organization: you make one monthly payment to it, and it pays your creditors, often at lower rates.

• Debt settlement

  Paying a creditor a lump sum that's less than the full balance, often through a for-profit company, in exchange for the creditor treating the debt as resolved.

• Bankruptcy

  A federal court process for people and businesses that can't pay their debts, ending in a discharge of many debts after an asset sale or a repayment plan.

• Chapter 7 bankruptcy

  A form of bankruptcy in which a court trustee sells property the law doesn't protect to pay creditors, and most remaining debts are discharged, usually within months.

• Debt payoff plan

  A written plan for clearing your debts: every balance, rate and minimum listed, an order to pay them in, and the extra you'll add each month.

Debt and credit