The typical credit counseling program is a repayment plan to unsecured creditors. Essentially, what a credit counselor does is negotiate a repayment plan with creditors. The plan will usually allow the debtor to pay less in interest to the creditors. Credit counseling will typically not provide for a reduction in the principle amount owed. The typical credit counseling plan lasts for five years. The payment is based upon the amount of debt owed to the creditors and the fees of the credit counseling agency.
There are a number of pitfalls involved in choosing credit counseling as an option to dealing with debt. The first issue involves the payment. Because the principle owed to the creditor is not reduced, the payments are often simply not affordable for many debtors. Also the payments are not flexible, if a person participating in a credit counseling program has a loss in income, the credit counseling payment remains the same. If a person can not make the payment, the person will be removed from the plan.
Another issue which frequently reeks havoc with credit counseling plans is that if all creditors do not agree to the plan, then those who do not agree are not bound to the plan and are free to continue to attempt to collect on the debt owed to them. For example, if one creditor holds out and is not being paid through the plan, that creditor could sue the debtor and then garnish the debtor’s wages which may make it impossible for the debtor to continue on with the credit counseling plan. It is not uncommon for a creditor to refuse to participate in a credit counseling plan especially if the creditor already has obtained a judgment against the debtor or if the debt has already been turned over to a collection agency.