Credit Counselling

What is Credit Counselling

Credit counseling is a process offering education to consumers about how to avoid incurring debts that cannot be repaid through establishing an effective Debt Management Plan and Budget. Credit counseling is usually less typified by functions of credit education or the psychology of spending habits, rather credit counseling establishes a planned method of debt relief, typically through a Debt Management Plan.

Credit counseling often involves negotiating with creditors to establish a debt management plan (DMP) for a consumer. A DMP may help the debtor repay his or her debt by working out a repayment plan with the creditor. DMPs, set up by credit counselors, usually offer reduced payments, fees and interest rates to the client. Credit counselors refer to the terms dictated by the creditors to determine payments or interest reductions offered to consumers in a debt management plan.

What is Bankruptcy?
Bankruptcy is a legally declared inability or impairment of ability of an individual or organization to pay its creditors. Creditors may file a bankruptcy petition against a debtor (“involuntary bankruptcy”) in an effort to recoup a portion of what they are owed or initiate a restructuring. In the majority of cases, however, bankruptcy is initiated by the debtor (a “voluntary bankruptcy” that is filed by the insolvent individual or organization).

Reduce Your Debt Guide
Millions of people out there have paid off significant credit card debt. Now it’s your turn. In short, your get-out-of-debt goal is to assess, organize, attack, and then lather, rinse, repeat until those balances are down to $0.

Don’t worry; we’re with you every step of the way. Here’s your six-step action plan for getting your debt under control.

1. Stop using your cards.
The last thing you want to do with credit card debt is add to it. Take all your credit cards out of your wallet or purse and leave them at home – safely out-of-reach behind a major appliance, or trapped in an ice block in your freezer. (You may want to keep one for emergencies. And not, a really great sandal sale or a cool new Bluetooth-enabled gadget does not qualify as an emergency.)

2. Assess your debt-to-income ratio.
It’s time to face those debt demons and get a bird’s-eye view of where you stand. Some debts, like mortgages and student loans, are just part of life. But the other ones (credit cards, car loans — a.k.a. “bad debt”) can bring down your financial house of cards with an innocent sneeze. Use the debt calculator to add the debts and see where you stand.

3. Dig into the details.
Don’t just throw yourself at a mountain of debt without preparation. Knowing the dirty details about your enemy is half the battle in conquering credit card bills. How many cards do you have? What interest rates do they charge? Which have the highest balances? Are the payments flexible? Is the debt “secured” or “unsecured”? Once you use our Credit Card Debt Calculator, you’ll know exactly what you’re facing.

4. Reduce your interest rates.
One phone call can save you thousands of dollars. Sounds like marketing hype, but it’s true. Getting your lender to lower your interest rate will fast-track your debt freedom plan. Call your lender ASAP. Their telephone number is on every statement they send you.

5. Plan your attack.
It’s time to form your battle plan. Pick a date. That’s when you’ll celebrate “Freedom From Debt Day.

6. Schedule a few (inexpensive) rewards.
Debt boot camp can get dull. Without a few treats along the way, you risk slipping back into old spending habits.

Debt Management

A Debt Management Plan (DMP) is a method used in various countries for paying personal unsecured debts. Typically, such debts are out of control – payments are late and/or take too large a portion of income, or even exceed it. A DMP usually involves a third party organization that looks at all or some of the debts, assessing income and budget, and re-negotiating interest rates and payments with the lenders. The negotiated rates and payment plan is based upon the probability of a higher likelihood of collection by the lenders in light of the debtor’s more realistic monthly repayment.

Some debts have priority over others and not all are amenable to participating in a DMP. You might have to deal with these types of debts first. Money left over after dealing with these debts and priority expenses may be suitable for a DMP.

How does a Debt Management Plan work?
DMPs are typically a managed arrangement with creditors through a third party. The debtor may use a free creditor-sponsored DMP organisation or a fee-charging DMP company. Accepting any terms of a DMP proposal put forward on behalf of the debtor is always at the discretion of the creditors. A good debt advice service recognises this and will only suggest a debtor pays what they can realistically afford after their priority expenses are met. Priority expenses usually include mortgage or rent, food and utilities. Creditors usually request a review of the debtor’s situation annually to ensure they are paying as much as they can reasonably afford.

Fee Charging
DMP companies will often charge up-front fees as an ‘admin’ charge, and then will charge a percentage of the surplus that is paid to the creditor as a fee to the debtor. The larger the payment the debtor is encouraged to make, the larger the fee the fee-charging DMP company receives. Also, there is the possibility that a fee-charging DMP company will enter a debtor into this kind of arrangement when it is not in the debtors interest and bankruptcy might be a better alternative, especially if the debtor has large debts and it would take them many years to pay their debts back this way.

The fees charged by DMP companies are usually a percentage of the monthly amount paid, money that could theoretically be going to clear the debt itself if no fees were charged to the debtor. However fee-charging companies may offer enhanced support and administration services to the debtor throughout the programme. It is also common for fee-charging companies to employ dedicated “creditor liaison” departments who can negotiate with creditors directly in terms of stopping interest and other charges being added to the debts in question.

Free or Low Cost Services
Non-fee or low-fee DMP organisations are typically charities or government agencies that offer a consumer credit counselling service. Their function is typically the same as a fee-paying DMP, without the initial premium and the continuing levy per payment that may add to the debtors difficulties.
What kind of debts in a DMP?

People that use a DMP to eliminate their debt will typically only have unsecured debts such as personal loans, credit cards, bank overdrafts and store cards included in their plan. Secured debts or priority costs, like mortgages, car repayments, rent and utilities, are not subject to monthly payment reductions.

Credit Ratings
When someone participates in a DMP the likelihood that their credit rating will be damaged already is very high. It is not the DMP that affects the credit rating directly, but the inability of the debtor to meet their contractual payments that will be recorded on their credit file – usually in the form of a default notice. Any Court action taken by the creditor is also recorded on credit files.

If you have any difficulties at any time, please contact our office.

Debt Consolidation

Debt consolidation entails taking out one loan to pay off many others. This is often done to secure a lower interest rate, secure a fixed interest rate or for the convenience of servicing only one loan.

Debt consolidation can simply be from a number of unsecured loans into another unsecured loan, but more often it involves a secured loan against an asset that serves as collateral, most commonly a house. In this case, a mortgage is secured against the house. The collateralization of the loan allows a lower interest rate than without it, because by collateralizing, the asset owner agrees to allow the forced sale (foreclosure) of the asset to pay back the loan. The risk to the lender is reduced so the interest rate offered is lower.

Sometimes, debt consolidation companies can discount the amount of the loan. When the debtor is in danger of bankruptcy, the debt consolidator will buy the loan at a discount. A prudent debtor can shop around for consolidators who will pass along some of the savings. Consolidation can affect the ability of the debtor to discharge debts in bankruptcy, so the decision to consolidate must be weighed carefully.

Debt consolidation is often advisable in theory when someone is paying credit card debt. Credit cards can carry a much larger interest rate than even an unsecured loan from a bank. Debtors with property such as a home or car may get a lower rate through a secured loan using their property as collateral. Then the total interest and the total cash flow paid towards the debt is lower allowing the debt to be paid off sooner, incurring less interest.

If you have any difficulties at any time, please contact our office.

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