Credit counseling

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Credit counseling (known in the United Kingdom as debt counseling) is commonly a process that is used to help individual debtors with debt settlement through education, budgeting and the use of a variety of tools with the goal to reduce and ultimately eliminate debt. [1] Credit counseling is most often done by Credit counseling agencies that are empowered by contract to act on behalf of the debtor to negotiate with creditors to resolve debt that is beyond a debtor's ability to pay. Some of the agencies are non-profits that charge at no or non-fee rates, while others can be for-profit and include high fees. Regulations on credit counseling and Credit counseling agencies varies by country and sometimes within regions of the countries themselves. [1] In the United States, individuals filing Chapter 13 bankruptcy are required to receive counseling.

Contents

Overview

In the United States, the National Foundation for Credit Counseling was established in 1951. The modern practice known as ‘‘credit counseling’’ was initiated by creditor banks and credit card companies during the mid-1960s to address the growing volume of personal bankruptcies. [2]

Although there is variation from country to country and even in regions within country, consumer debt is primarily made up of home loans, credit card debt and car loans. [3]

Credit counseling includes an array of services to address consumer debt that is not within the debtor's ability to pay, such as education about credit personal finance, budgeting and debt management. In addition to education, a popular credit counseling option is the ‘‘Debt management plan’’ (‘‘DMP’’, known in the United Kingdom as the Individual voluntary arrangement or "IVA").

In order to initiate a DMP, a consumer would authorize the credit counselor to contact each of the consumer’s unsecured creditors and negotiate with each creditor to lower the consumer’s monthly payment amount, to lower the interest rate, and to waive any outstanding late fees. The debt was then ‘‘consolidated’’ into a single payment. [1]

Credit counselors can sometimes negotiate debt relief, where part or whole of an individual debt is forgiven. Another option is Debt consolidation, in which one new loan replaces multiple unsecured credit debts. The Debt-snowball method is a budgeting approach that addresses debt systematically.

Criticism

Global criticism of credit counseling comes primarily from predatory practices that take advantage of debtors that are already struggling. [4] These practices include failing to meet required standards, charging unlawful or unreasonable fees, failing to provide affordable solutions for consumers, and neglecting to make customers aware of free debt services available elsewhere. [5]

Regulations by country

United States

In the United States, Credit counseling agencies are loosely regulated by the Federal Trade Commission (FTC), the nation’s consumer protection agency, which can sue companies that have deceived consumers about the cost, nature, or benefits of their services. [1] Different states may regulate DMPs individually and Attorneys General are empowered to protect state citizens from fraud. [4] Two professional associations represent Credit counselors: the National Foundation for Credit Counseling and the Association of Independent Consumer Credit Counseling Agencies.

United Kingdom

In the United Kingdom, the Financial Conduct Authority is responsible for the regulation of consumer credit and has established a Debt Management Plan Protocol. It can impose fines for improper conduct. [5]

European Union

Elsewhere in the European Union, regulation and non-regulation of Credit counseling agencies and their approaches, including DMPs, are widely varied. In Sweden, guidelines for credit counseling are loosely provided by the Swedish Confederation of Professional Employees (TCO) and creditors are encouraged to use them in lieu of the court system. In Ireland, the Irish Congress of Trade Unions (ICTU) provides debt resolution information directly to debtors. In Latvia, a debt advisory company called LAKRA works with employers to assist indebted employees. [6]

Canada

The Financial Consumer Agency of Canada (FCAC) [7] advises Canadians to do their research and find a trustworthy organization and a qualified counselor. They suggest making sure an agency is in good standing with a provincial or national association. They recommend looking carefully at the agency's advertising to see if it sounds too good to be true. Claims or misrepresentations to look out for can include repaying only a fraction of your debt, quickly fixing your credit score, or claiming to be part of a government program.

They also suggest consumers inquire about an agency's services, costs, and counselor qualifications. [8] The FCAC has also warns Canadians to be careful of companies offering to help them pay off their debt or repair their credit. Things to watch out for include guarantees to solve debt problems and using high interest loans to pay off debt. Some of these companies also claim that they can file a consumer proposal on behalf of a consumer. However, the FCAC points out that only a qualified licensed insolvency trustee can help someone with a consumer proposal or bankruptcy. [9]

South Africa

The National Credit Regulator (NCR) was established as the regulator under the National Credit Act No. 34 of 2005 (The Act) and is responsible for the regulation of the South African credit industry. It is tasked with carrying out education, research, policy development, registration of industry participants, investigation of complaints, and ensuring the enforcement of the Act.

The NCR is also tasked with the registration of credit providers, credit bureau and debt counsellors; and with the enforcement of compliance with the Act. Debt Counseling was introduced and enforced in 2007. This enabled over-indebted consumers to seek relief in accordance to the National Credit Act (NCA). The NCA has been amended several times since its inception and various new regulations published.

In South Africa debt counselling (as done through the courts by NCR registered debt counsellors) is seen as legitimate and legally recognised process while the use of the term credit counselling is often associated with scams or fake services that are not regulated.

See also

Related Research Articles

Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the debtor.

Chapter 7 of Title 11 U.S. Code is the bankruptcy code that governs the process of liquidation under the bankruptcy laws of the U.S. In contrast to bankruptcy under Chapter 11 and Chapter 13, which govern the process of reorganization of a debtor, Chapter 7 bankruptcy is the most common form of bankruptcy in the U.S.

Debt relief or debt cancellation is the partial or total forgiveness of debt, or the slowing or stopping of debt growth, owed by individuals, corporations, or nations.

<span class="mw-page-title-main">Debt consolidation</span> Form of debt refinancing

Debt consolidation is a form of debt refinancing that entails taking out one loan to pay off many others. This commonly refers to a personal finance process of individuals addressing high consumer debt, but occasionally it can also refer to a country's fiscal approach to consolidate corporate debt or government debt. The process can secure a lower overall interest rate to the entire debt load and provide the convenience of servicing only one loan or debt.

Debt restructuring is a process that allows a private or public company or a sovereign entity facing cash flow problems and financial distress to reduce and renegotiate its delinquent debts to improve or restore liquidity so that it can continue its operations.

<span class="mw-page-title-main">Fair Debt Collection Practices Act</span> U.S. consumer protection law

The Fair Debt Collection Practices Act (FDCPA), Pub. L. 95-109; 91 Stat. 874, codified as 15 U.S.C. § 1692 –1692p, approved on September 20, 1977, is a consumer protection amendment, establishing legal protection from abusive debt collection practices, to the Consumer Credit Protection Act, as Title VIII of that Act. The statute's stated purposes are: to eliminate abusive practices in the collection of consumer debts, to promote fair debt collection, and to provide consumers with an avenue for disputing and obtaining validation of debt information in order to ensure the information's accuracy. The Act creates guidelines under which debt collectors may conduct business, defines rights of consumers involved with debt collectors, and prescribes penalties and remedies for violations of the Act. It is sometimes used in conjunction with the Fair Credit Reporting Act.

<span class="mw-page-title-main">Fair Credit Reporting Act</span> U.S. federal legislation

The Fair Credit Reporting Act (FCRA), 15 U.S.C. § 1681 et seq., is federal legislation enacted to promote the accuracy, fairness, and privacy of consumer information contained in the files of consumer reporting agencies. It was intended to shield consumers from the willful and/or negligent inclusion of erroneous data in their credit reports. To that end, the FCRA regulates the collection, dissemination, and use of consumer information, including consumer credit information. Together with the Fair Debt Collection Practices Act (FDCPA), the FCRA forms the foundation of consumer rights law in the United States. It was originally passed in 1970, and is enforced by the U.S. Federal Trade Commission, the Consumer Financial Protection Bureau, and private litigants.

A credit history is a record of a borrower's responsible repayment of debts. A credit report is a record of the borrower's credit history from a number of sources, including banks, credit card companies, collection agencies, and governments. A borrower's credit score is the result of a mathematical algorithm applied to a credit report and other sources of information to predict future delinquency.

<span class="mw-page-title-main">Debt collection</span> Pursuit of debt payments owed by an individual or business

Debt collection is the process of pursuing payments of money or other agreed-upon value owed to a creditor. The debtors may be individuals or businesses. An organization that specializes in debt collection is known as a collection agency or debt collector. Most collection agencies operate as agents of creditors and collect debts for a fee or percentage of the total amount owed. Historically, debtors could face debt slavery, debtor's prison, or coercive collection methods. In the 21st century in many countries, legislation regulates debt collectors, and limits harassment and practices deemed unfair.

<span class="mw-page-title-main">Bankruptcy Abuse Prevention and Consumer Protection Act</span> 2005 American bill

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) is a legislative act that made several significant changes to the United States Bankruptcy Code.

<span class="mw-page-title-main">Consumer Credit Act 1974</span> An Act of Parliament from the United Kingdom in 1974

The Consumer Credit Act 1974 is an Act of the Parliament of the United Kingdom that significantly reformed the law relating to consumer credit within the United Kingdom.

A bankruptcy discharge is a court order that releases an individual or business from specific debts and obligations they owe to creditors. In other words, it's a legal process that eliminates the debtor's liability to pay certain types of debts they owe before filing the bankruptcy case.

A credit bureau is a data collection agency that gathers account information from various creditors and provides that information to a consumer reporting agency in the United States, a credit reference agency in the United Kingdom, a credit reporting body in Australia, a credit information company (CIC) in India, Special Accessing Entity in the Philippines, and also to private lenders. It is not the same as a credit rating agency.

Debt settlement is a settlement negotiated with a debtor's unsecured creditor. Commonly, creditors agree to forgive a large part of the debt: perhaps around half, though results can vary widely. When settlements are finalized, the terms are put in writing. It is common that the debtor makes one lump-sum payment in exchange for the creditor agreeing that the debt is now cancelled and the matter closed. Some settlements are paid out over a number of months. In either case, as long as the debtor does what is agreed in the negotiation, no outstanding debt will appear on the former debtor's credit report.

<span class="mw-page-title-main">Debt management plan</span>

Debt management plan (DMP) is an agreement between a debtor and a creditor that addresses the terms of an outstanding debt. This commonly refers to a personal finance process of individuals addressing high consumer debt. Debt management plans help reduce outstanding, unsecured debts over time to help the debtor regain control of finances. The process can secure a lower overall interest rate, longer repayment terms, or an overall reduction in the debt itself.

A debt buyer is a company, sometimes a collection agency, a private debt collection law firm, or a private investor, that purchases delinquent or charged-off debts from a creditor or lender for a percentage of the face value of the debt based on the potential collectibility of the accounts. The debt buyer can then collect on its own, utilize the services of a third-party collection agency, repackage and resell portions of the purchased portfolio, or use any combination of these options.

The Uniform Debt-Management Services Act was promulgated in 2005 by the Uniform Law Commissioners. It provides the states with a comprehensive act governing national administration of debt counseling and management in a fair and effective way.

A charge-off or chargeoff is a declaration by a creditor that an amount of debt is unlikely to be collected. This occurs when a consumer becomes severely delinquent on a debt. Traditionally, creditors make this declaration at the point of six months without payment. A charge-off is a form of write-off.

The National Foundation for Credit Counseling (NFCC), founded in 1951, is the largest and longest-serving nonprofit financial counseling organization in the United States. NFCC member agencies provide access to financial counseling services for consumers. The organization's headquarters is in Washington, DC and is led by Mike Croxson, their Chief Executive Officer.

Credit agreements in South Africa are agreements or contracts in South Africa in terms of which payment or repayment by one party to another is deferred. This entry discusses the core elements of credit agreements as defined in the National Credit Act, and the consequences of concluding a credit agreement in South Africa.

References

  1. 1 2 3 4 FTC (Federal Trade Commission). "For People on Debt Management Plans: A Must-Do List" (PDF). FTC.gov. Federal Trade Commission (United States Government). Archived from the original (PDF) on 20 September 2017. Retrieved 11 February 2018.
  2. ↑ United States Senate (April 13, 2005). ""Profiteering in a Non-Profit Industry: Abusive Practices in Credit Counseling" a report by the Permanent Subcommittee on Investigations of the Committee on Homeland Security and Governmental Affairs United States Senate" (PDF). United States Government. Retrieved 11 February 2018.
  3. ↑ Albert-Deitch, Cameron (November 18, 2014). "Hey Big Spenders, Where the Biggest Debtors in America Call Home (Interactive)". Inc. Interactive by debtconsolidation.com. Retrieved 11 February 2018.
  4. 1 2 Civil Court Committee, Consumer Affairs COmmittee, (New York State Bar Association) (May 2012). "Profiteering from Financial Distress: An Examination of the Debt Settlement Industry" (PDF). Retrieved 11 February 2018.
  5. 1 2 Evans, Judith (December 18, 2014). "UK debt management company Harrington Brooks to pay compensation". FT.com Financials. Retrieved 11 February 2018.
  6. ↑ DuBois, Hans (August 11, 2011). "Household debt advisory services in the European Union" (PDF). EUROFOUND . Retrieved 11 February 2018.
  7. ↑ "Managing Debt". Financial Consumer Agency of Canada. Government of Canada. 30 August 2016. Retrieved 11 February 2018.
  8. ↑ "Getting help from a credit counsellor". Government of Canada. 24 November 2016. Retrieved November 24, 2018.
  9. ↑ "Consumer Alert: What you need to know when getting help to pay off debt or repair your credit". Government of Canada. 5 April 2017. Retrieved November 24, 2018.
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