Stages of Debt Management and Credit Counseling

The purpose of debt management is to ensure that debtors who are finding it impossible to deal with mounting debts, either due to insufficient domain expertise or on account of inherent flaws in their credit management strategies, can rely on a well structured individualized manageable repayment plan that is especially designed for them.

Certified credit counselors help consumers develop strategies that can help them manage their debts. These strategies come under the purview of debt management. Credit counseling agencies are typically non-profit agencies, whose aim is to help consumers get rid of their debt burden. Good agencies should not follow a system of commission based income, since this tends to influence the decisions and the recommendations of the debt counselors. National Foundation for Credit Counseling (NFCC) and members of the NFCC such as Consumer Credit Counseling Services (CCCS) should be contacted for information regarding choosing the appropriate agency.

Stages of Debt Management and Credit Counseling

Stage 1: Counseling is the first stage of debt management. Credit counseling sessions are a must for people who want to file bankruptcy. In fact, petitioners should have sought counseling at least 180 days before filing bankruptcy, if not earlier, unless they have been exempt from counseling on account of emergency situations, or the trustees appointed by the court have determined the dearth of approved agencies to provide the requisite counseling. Debt repayment plans that are developed during the credit counseling sessions need to be filed with the court. Credit counseling agencies may be able to work out debt settlement plans for people who are on the verge of filing bankruptcy. For others, credit counseling may be useful for ensuring the best use of credit, preparing a good household budget, increasing savings, and adhering to a debt repayment schedule for discharging debts that seem insurmountable.

Stage 2: Enrolling in a voluntary debt management program is the next step that ensures that debt obligations are discharged in accordance with a repayment schedule that is drafted during the counseling session. The credit counseling agencies may negotiate with the creditors and try and lower monthly payments. This is usually accomplished by opening a new credit line that functions as a debt consolidation loan. In some cases, the credit counseling agencies may also work to have open ended accounts, viz. credit cards re-aged. Re-aging is the process of relabeling an account as current. This does not mean that the debtor does not have to repay the dues. It just means that the account is no longer considered delinquent and this is accomplished by making at least three consecutive monthly payments, or an equivalent lump sum payment, and making monthly payments till the account balance falls below the pre-delinquency credit limit. Creditors are only allowed to re-age open ended accounts once in a 12-month period and twice in a five-year period. One must note that re-aging is synonymous with not being able to access a new line of credit. Debt management thus helps to reduce late charges and fees from accruing and further burdening the debtor.

Debt Management and Credit Score

Debt management involves both debt consolidation and re-aging, and these are highly beneficial to the debtor. Re-aging helps to improve credit scores since the accounts are no longer marked as past due. From the lender's perspective, recovering debts by consolidation is the best option after the debtor has defaulted on debts for over five months, since recovering debts by repossession or labeling them as non-collectible are the other alternatives. Bad debts earn the debtor a credit rating of R9/I9 while repossession results in a rating of R8 or I8. Consolidation, on the other hand, results in the debtor receiving a rating of R7 or I7 which is definitely much better than the aforementioned ratings.

Paying off debts usually within a period of 5 years is the net result of debt management and credit counseling. Thus, the issue of seemingly insurmountable debts are tackled with relative ease.