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Do credit counseling agencies provide debt relief?

Some Massachusetts residents may choose to consider alternatives to a Chapter 7 bankruptcy or a Chapter 13 bankruptcy for a variety of reasons. To this end, several different "credit counseling" companies promise debt relief to their customers. Specifically, they provide advice and, for a fee, will help debtors negotiate a repayment plan with their creditors, supposedly giving those struggling under the weight of debt hope for a fresh start in their finances.

However, the people of Massachusetts need to be aware of the risks that are associated with some of these credit counseling agencies, many of which tout their not-for-profit status.

For one, a creditor has no obligation to negotiate with a debtor or a credit counseling agency. A creditor may elect instead to pursue its rights to collect a debt despite the fact that the debtor has proposed a payment plan.

In one case, a man who used a credit counseling agency tried a payment plan, but one creditor refused to negotiate and sent him to collections. He wound up filing bankruptcy to protect himself, but the credit counseling agency kept the fees it had taken out of each of his monthly payments. He did not get a refund despite a lawsuit.

It is difficult to determine how often a credit counseling agency successfully helps a debtor complete a payment plan. While the credit counseling agencies say that half of their customers on a plan successfully complete it, others claim that the success rate is actually a lot lower.

Furthermore, some of these not-for-profit agencies are in fact anything but. The IRS has challenged the not-for-profit status of more than one of these agencies, including one that is the sixth largest agency in the United States.

While certainly some debtors may have success with credit counseling agencies or their for-profit counterparts, there are potential pitfalls to this approach. A bankruptcy can offer prompt legal protection from a creditor, and that creditor has no legal option but to comply with bankruptcy law. Massachusetts families may be best off simply starting the bankruptcy process if they find themselves in financial distress.

Source: Fox Business, "Behind the credit counseling curtain," Fred O. Williams, Feb. 11, 2013

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