When you have difficulty paying bills and you don't see relief in the foreseeable future, it may be time for financial counseling from a nonprofit service. You can get help with creditors and learn how to manage your income so that you don't get in further trouble. However, you must choose your financial counselor wisely. If you work with the wrong organization, you could end up in worse financial shape than before you sought help.
The United States Department of Justice maintains a list of approved nonprofit financial counselors by state at justice.gov (see Resources). Financial counseling services are not always reputable, so make sure you choose one that is approved by the Justice Department. This means the service has some accountability to the federal government.
Federal Trade Commission Guidelines
The Federal Trade Commission warns those seeking financial guidance that "nonprofit" does not necessarily mean there will be no fees. In fact, some charge high rates. If a counselor will not work with you because you can't afford the fees, the FTC recommends you look elsewhere. Before signing with a counseling agency, ask if employees work on commission. The FTC frowns on commissioned financial counselors. "Nonprofit" does not automatically mean a service is trustworthy, either. Ask the service if it is registered with your state.
Expect a review of your entire financial condition, free educational materials and a discussion of how a debt management plan (DMP) may help you. With a DMP you the credit counselor money each month, and that counselor pays your creditors according to a negotiated payment plan. Creditors may lower interest rates, accept lower monthly minimums or even forgive part of your debt if you are working with a qualified nonprofit financial counselor. You do not have to accept a DMP to manage your finances. Your counselor should make you aware of your options, including creating your own budget and negotiating with creditors yourself.
A company that offers you a debt-settlement option is not a nonprofit financial counselor. Debt-settlement companies are for-profit. They persuade credit card companies to accept a lump sum payment that is less than you owe. You have to set aside a specific amount each month in an escrow account until you have accumulated that lump sum. These companies urge clients to stop making credit card payments and concentrate on accumulating the lump sum. This hurts your credit rating. Since IRS counts forgiven debt as income, you must pay tax on the portion of your debt that is forgiven. .
Kevin Johnston writes for Ameriprise Financial, the Rutgers University MBA Program and Evan Carmichael. He has written about business, marketing, finance, sales and investing for publications such as "The New York Daily News," "Business Age" and "Nation's Business." He is an instructional designer with credits for companies such as ADP, Standard and Poor's and Bank of America.