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Are you in need of SPECIALIZED Debt Management (counseling)$%: Like many today I was under the impression that "traditional firms" such as Consumer Credit Counseling Service (CCCS), National Foundation of Consumer Credit (NFCC) member firms and other "non-profit" firms were the standard for the industry and that EVERYONE with a debt problem was best served by these groups. Boy!!!! Was I wrong!

I discovered many myths based upon methods that are now essentially null and void. Yet many in the credit management industry don't want the consumer to know because it is not in the best interest of the major credit counseling players.

In this feature and the follow up article referenced at the end, you will learn the truth... not the hype and self serving advertising you are use to. I will state emphatically here and now that I am not associated with any referenced individual or company for any form of recompense. What you read is simply the truth as has been presented to me.

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The person who opened my eyes was Jim Young of Accelerated Debt Consolidation, Inc. He offered me incredible concepts rarely discussed by "traditional" firms. I appropriately labeled Jim's company (and any other similar agencies) "Specialized Debt Management". You will discover in this article the reason why the difference in labels and why the two are so uniquely different with their Debt Management Programs (DMP).

Non-Profit (NP) Does Not Improve Interest Rates

The first issue that Jim brought to my attention was that reduced interest rates consumers receive from their creditors are EXACTLY the same whether the client uses a For-Profit (FP) or a Non-Profit (NP) firm. For example, if a client owes Chase Bank $10,000, Chase requires 2% of the balance or $200 per month as a minimum payment in the DMP and they offer 6% for the debt management interest rate. This is what a client of a debt management firm would get whether the proposal submitted to Chase came from a FP or a NP firm. It was also brought to my attention that this "universal umbrella" of NP as it relates to credit counseling and debt management was not all it was cracked up to be.

NP Myths Built Upon Extinct "Fair Share" Concepts

After some research I found out that some of the firms with the worst records in the business were in fact Non-Profit (NP) and making very large amounts of money. These groups were about as "Non Profit" as Donald Trump. Mr. Young explained to me that for many years credit counseling and debt management firms received what is known as a "Fair Share" distribution from the creditors. This in no way affected what the clients paid or how much was credited to their accounts but it was in fact quite significant in the debt management firms earnings. For example, in the past debt management firms could deduct 12% of a client's payment going to American Express for Fair Share. So if a clients payment to AMEX through the program was $100 the firm could deduct $12 and send AMEX $88. The clients account at AMEX, however, was credited the whole $100. Thus the debt management firm received some serious earnings.

Creditors paid only "Fair Share" to NP groups that could then be a tax write-off for "contribution" to a NP organization. There is absolutely nothing wrong with this concept and it did not affect what the clients accounts were credited. But "Fair Share Distribution" from the major creditors has since been dramatically reduced and it is clearly not as much of an issue as it once was.

Capitalizing On The Myth

In the early to mid 90's debt management firms began springing up all over the country. Many started using their NP status as a marketing tool, allowing prospective clients to believe that they were some form of public service. This led the consumer to believe clients would get their services for less because they were NP or operating as a "Benevolent Charity".

As was stated above, the truth is that interest reductions and minimum payments are EXACTLY the same regardless of counseling agency. The only difference would be in the fees charged (and services provided). There were large variations in the area of fees. Not all but many firms (both FP and NP) retained the client's first payment as a set up fee. Though consumer advocates frown upon this practice, some firms still performed well. It is a practice that could be done when all creditors re-aged past due accounts to a current status after the proposals were accepted. Some creditors like Citibank and Discover no longer re-age delinquent accounts so retaining the client's first payment has become a problem.

NFCC and CCCS

As the years went on I looked into NFCC membership. It seems that NFCC member firms are all CCCS offices. Some of them have different names like The Green Path, Money Management International which is now the parent company over CCCS and Clear Point Credit Solutions. So although I am not absolutely sure that they are the only members, it seems that the NFCC really may have only one member because every NFCC member firm I have researched seems to be connected to CCCS or in fact is a CCCS. If this is true, it seems a bit convenient to have financial advisors all over the country saying "Make Sure They Are An NFCC Member".

In my experience as Credit/Debt Management guide, I still believe that NFCC member firms (CCCS) do in fact perform very well for consumers that have debt problems. They do offer fine educational materials free of charge and have many years of experience at helping consumers get out of debt.

Reader Feedback On Traditional Policy

Over the years many consumers have written and explained how these "Traditional" services are in actual practice. Let me share what they have told me from their own persona experiences.

After an initial CCCS or "Traditional" consultation if it is determined that a consumer is in need of a debt management plan or "DMP" and is qualified for it, another appointment is scheduled. A very reasonable set up fee of approximately $40 is charged if the client intends to enroll. Of the $40 fee $12 is used to obtain a copy of the clients credit report.

Based on reports from consumers that wrote to me, it appears that the rationale for the credit report is to reveal ALL ACCOUNTS that the consumer has because these firms require clients to close and or INCLUDE all revolving accounts in the DMP. In the past many CCCS offices did not enroll clients that were current on their accounts and would not enroll clients unless they were at least 30 days delinquent. I have received reports that some CCCS offices still do not enroll clients in DMP'S that are current on their accounts telling them that no hardship exists.

The reason for the delay is that disbursements to creditors are only made twice a month instead of daily. This causes a problem in billing cycles if the client is current because he or she may have 8 accounts in the program with various due dates. If a client was current on all accounts when he or she enrolled in the program and steps were not taken to adjust due dates prior to enrollment, this would cause some accounts to be late if payments were not disbursed in accordance with the clients due dates. This also relieves the debt management firm of any liability as it relates to the clients credit because the client was already behind when they enrolled.

Many CCCS offices also engage in a "Credit Card Cutting" ceremony of sorts where the client is required to bring in all credit cards and cut them up. I find this to be a bit of an undignified process to subject someone to. It has also been reported that their client agreement includes a section requiring DMP clients to DESTROY ALL CREDIT CARDS and close all open lines of credit and they must also agree that they will not apply for any new lines of credit while enrolled in the program. I agree that when someone has a debt problem they may also have a spending problem so agreeing to abstain from incurring any additional debt may be a good policy for many who have reached the point of severe delinquency and credit deterioration. However this may not be the only option for a consumer that may have incurred some debt due to situations out of his or her control that needs help while still requiring some lines of credit for work, business and emergencies.

The Good, The Bad, The Ugly

In fairness I will state that in my years of advising consumers on debt problems I have heard many positive reports about these traditional Credit Counseling firms and have never heard any reports of anyone being misled or being taken in a fraudulent manner, as is the case with many other firms.
However I have received many reports from consumers stating that they could not utilize such a program due to the lack of flexibility for their needs. I have also received reports about billing cycle problems related to creditor disbursements as a result of not taking steps to coordinate due dates and the resulting problems from not disbursing payments to creditors daily. Also, I am aware of complaints about face to face in-office appointments without the option of handling it over the phone. The most common complaints I have heard about these traditional debt management programs is the lack of flexibility and a feeling of being "put on probation" while in the program.

Summary of Traditional Services

Here then is a summary (good and bad) of traditional debt management services:

They provide valuable educational materials

They can reduce interest rates on accounts and get delinquent accounts re-aged

If you stay with the program you will be debt free in a much shorter time period than on you own

You will be required to close all existing lines of credit

You must agree not to open or use any lines of credit

Very little if any steps will be taken to minimize credit damage

When you complete the program your credit rating will improve

Upon completion you should be able to obtain new credit

You may have to be delinquent on accounts for acceptance

You will have the convenience of just one monthly payment

You may be required to attend 1 or 2 in-office appointments

When reviewing the results of the traditional program above it is clear that this would be a very beneficial program for someone overloaded with debt, possibly delinquent on the payments and who has demonstrated a lack of control over spending and who has deteriorating credit worthiness. A consumer like this would benefit from a program that prevents him from falling further into debt and also offers some "supervision" preventing further misuse of credit while helping this consumer to get out of debt much faster.

But where does the consumer go that has good credit, needs to maintain lines of credit to function, is current on his accounts and/or wants to maintain his credit$%: For that answer please see the follow-up article Specialized Debt Counseling.

Readers will probably be interested to know Mike, the author of this article, also offers a free debt elimination mini-course via e-mail. You can enroll at Debt Free In 7.5 Years .