Debt Consolidation Through Consumer Credit Counseling |
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Consumer credit counseling agencies don't offer loans but restructure a consumer's debt with special channels available only to non-profit consumer credit counseling agencies for debt consolidation. Major creditors usually have hardship programs allowing reduced payments and lower interest for consumers enrolling in the debt consolidation program, closing all or most of their unsecured accounts to place them in the program. Then the consumer makes fixed monthly-consolidated payment directly to the agency, which disburses the amount to the relevant creditors.
The outstanding balance at enrollment time forms the basis for the revised payment. As of now there are very few creditors charging as low as 1% payment of the balance or those exceeding 5%. The norm for the majority is 1.5% to 3%, more typically 2% to 2.2%. Unknown creditors and those without a hardship program have a payment proposal mailed or faxed by the agency according to industry standards. Most of the time creditors are not willing to lower payment or offer forbearance on loan accounts. Thus, the type of debt can be significant. Essentially it is the creditors, the debt type and amount owed to each creditor that determine the extent of reduction in a debtor's overall monthly payment through a consumer credit counseling agency. Sometimes savings can be significant or negligible. The only way to deduce this is through an analysis of the debtor's financial profile. All major creditors always have minimum payment requirements. In this situation, Superior Bank had a requirement of 2.2% as minimum payment. With a policy for the minimum payment to be met, they could lower their interest rate to 6%, wave off late fees and re-age the account to make it current. Without the minimum payment, none of these benefits apply. Generally creditors do not deviate from their policy. A consumer credit counseling agency can theoretically set up an account below each creditor's minimum payment to ensure even lower payment. With very low payment, there is no adjustment in the interest rate, leading to no liquidation of accounts. The client would not have their best interest met. It also matters how the agency calculates the fixed monthly consolidated payment, the minimum payment and the monthly service charges. Some merely add the amount of debt being placed in the program, using a set percentage to calculate the fixed monthly-consolidated payment. Thus if the total debt in the program amounts to $10,000, with the agency policy of 3% standard percentage rate, the fixed monthly-consolidated payment would be $300 plus the monthly service fee. Monthly service fee is a constant for most consumer credit counseling agencies. Non-profit organizations also require funds to conduct business and provide services. Due to some creditors' voluntary contributions to non-profit credit counseling agencies, the monthly service fee is lower. The monthly service fee mostly ranges from $20 to $50 with varying methods for calculating the fee within agencies. Often the total amount of debt or number of accounts in the program or a combination of both forms the basis for this. Precautions they take? Contrary to promotions, consumer credit counseling agencies do not negotiate with creditors. In reality, they set up a client account based on each creditor's hardship policy. If a debtor owes $1,000 to Superior Bank, with the hardship policy requiring a minimum of 2.2% of outstanding balance, the agency has to set up a payment of $22. If the debtor's regular minimum balance is $40, payment is reduced. In some cases there is hardly any reduction and may even result in increased payment. However, if a debtor is past his dues on regular payments and unable to catch up, there could be a significant reduction in the revised payment. This is due to enrollment in the program setting aside any past due amounts. Conclusion.. Debtors have a lot to lose from the growth of this trend. Agencies are compelled to increase service fees increasing the burden on clients and with reduced forbearance; the debt management program becomes less effective in rectifying a debtor's financial problems if at all. |
