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Credit Counseling Services and the Bankruptcy Conundrum

A press release out by Advantage Credit Counseling Service drew me to their site today. – Source.

While there I came across a good example of the ethical conundrum facing nonprofit credit counselors today. Advance Credit Counseling Service is not alone in dealing with this problem.

According to the Advantage Credit Counseling Service website they are a proud member of the National Foundation for Credit Counseling (NFCC), a trade/member organization of many nonprofit credit counseling groups across the United States. NFCC has been around a long time and is recognized by many as a trusted network of charitable groups that provide good financial information.

Over the years the focus of credit counseling seems to have become to actually not provide the “best” financial information for consumers but to screen those who could enter a debt management program which generates income for credit counseling groups. The vast majority of these groups, including the NFCC itself, are not transparent about the success rate and effectiveness of such programs.

While Advantage Credit Counseling Service promotes they are successful (source) I could not find any public data on the Advantage Credit Counseling Service website regarding their performance data like that is offered by this group as an example.

The Bankruptcy / Credit Counseling Conundrum

Having founded and run a nonprofit credit counseling service myself I am very aware of the ethical conundrum that faces modern credit counselors. They face this on two fronts. On one hand they want to attract business and sell mandatory pre-bankruptcy credit counseling certifications but on the other hand they are naturally biased to direct people to avoid bankruptcy and enroll into debt management plans that generate revenue for the organization.

Since groups like Advantage Credit Counseling Service are nonprofit IRS 501(c)3 charities they are required to file tax returns which are public. The last return available online that I found was from 2011. – Source

A review of that return found the following statements:

  • “AS A NONPROFIT ORGANIZATION, THE AGENCY PROVIDES MEANINGFUL, PROFESSIONAL AND CONFIDENTIAL CONSUMER EDUCATION AND BUDGET/CREDIT COUNSELING AND DEVELOPS EFFECTIVE DEBT REDUCTION PROGRAMS FOR ALL SEGMENTS 0F THE COMMUNITY.”
  • “ADVANTAGE CREDIT COUNSELING SERVICE, INC PROVIDES CREDIT-COUNSEUNG AND EDUCATIONAL SERVICES TO THE PUBUC SINCE ITS INCEPTION, THE AGENCY HAS ASSISTED THOUSANDS OF CUENTS IN DEVELOPING A BUDGET, DETERMINING OPTIONS FOR REPAYING DEBTS AND WHEN APPROPRIATE, ADMINISTERING A DEBT MANAGEMENT PROGRAM.”

It appears the group is telling the IRS and the public their goal is to provide consumers with good financial advice to determine what is best for the consumer.

They continue these statements today. In a press release issued on July 3, 2013 they say, “A certified credit counselor works one on one with the individual to create a budget and to find out if a debt management plan would be right for them.” – Source. What does “right” mean?

And therein lies the heart of the issue facing modern credit counseling. The question is, does a nonprofit charitable credit counseling group assist consumers to make the best financial decision for the consumer or for the credit counseling group?

It certainly appears Advantage Credit Counseling Service continues to make statements which favorably promote their solution above others, like bankruptcy. Even at this moment the Advantage Credit Counseling Service website promotes their debt management plan in a more favorable light.

They say the debt management plan will:

Our Debt Management Program Has Many Benefits.

  • Waive or reduce high interest rates
  • Eliminate late and over-limit fees
  • Stop harassing calls from creditors and collection agencies
  • Reduced monthly payments
  • Voluntary arrangement between you, your creditors and our agency

Our Debt Management Services Makes It Possible To:

  • Get a fresh start with your creditors
  • Save thousands in credit card interest
  • Avoid Bankruptcy
  • Improve your credit score
  • Once the credit counseling session is complete, the counselor may recommend our debt management program as an affordable way to recover from your unsecured credit card debt.
  • Our program will get you out from under your unsecured debts in three to five years instead of ten, or even twenty years.
  • Many creditors agree to reduce your interest rates. Because of these concessions, you will get out of debt many years sooner than if you continue to make only minimum payments to your creditors.
  • Get started today with immediate credit counseling to avoid bankruptcy, reduce your high interest rates, waive late and over limit fees and put a stop to the never ending creditor calls. – Source

Debt Management Is A Safe Alternative To Other Methods Of Debt Reduction, Including:

  • Chapter 7 bankruptcy
  • Chapter 13 bankruptcy
  • Debt settlement
  • Debt Consolidation loan
  • Home equity loan/ refinancing mortgage
  • Payday Loans – Source

So the messages Advantage Credit Counseling Service appears to be telling the world is that they can determine when a debt management plan is appropriate, avoiding bankruptcy is a goal, the debt management plan will improve your credit score (a problem under CROA), and a debt management plan is a safe alternative.

The Crux of the Problem

So does a NFCC member or credit counseling group like Advantage Credit Counseling Service really offer best financial advice for the consumer? It appears they give the impression they do but since such groups do not provide financial planning advice. So how can a credit counselor determine what is the best and safest alternative for a consumer in trouble?

Just as a comparison, Advantage credit counseling says people can get a number of benefits from their solution, such as getting out of debt many years sooner and they can avoid bankruptcy.

But bankruptcy eliminates debt in about 90 days for most people and legally eliminates all interest, stops collection calls, and reduces monthly payments. What is the benefit to the consumer to avoid that?

The public perception is nonprofit credit counseling groups are providing sound financial advice to guide consumers into making safe decisions about how to handle their finances. But where it all falls down is there appears to be little consideration of the overall consumer financial picture and just a focus on the credit card debt to enroll in a debt management plan.

This article, “The Saddest Avoidable Mistake People Make When Getting Out of Debt” addresses the silent but more critical issue facing people with money trouble. It seems consumers and also credit counselors leap to immediate solutions without a consideration to the long term cost.

From the Advantage Credit Counseling website it does not appear the focus is to provide solutions that will allow the consumer to accomplish their long term goals which would be in their financial interest but instead to avoid bankruptcy as a goal.

And yet at the same time the group promotes their bankruptcy counseling required by law for those that file bankruptcy. They want people to both avoid bankruptcy and use their services when they file for bankruptcy, thus the conundrum. How can both solutions be best for the consumer?

I would agree there are times when credit counseling is a good fit for consumers. A good example would be when someone is already saving and building an emergency fund, adequately saving for retirement, but struggling making the monthly credit card payments.

But if someone is on the verge of bankruptcy, not building their emergency fund and not adequately saving for retirement, it becomes logically more difficult to defend the use of a debt management plan in those situations.

I invite you to use the debt repayment calculator below and see the impact enrolling in an extended repayment plan has on the future financial health of a consumer.

Debt Repayment Calculator

Credit Counseling Services and the Bankruptcy Conundrum

What Will Debt Repayment Cost You in Retirement?

This calculator demonstrates the future retirement financial loss you may experience when electing to repay your debt with an extended repayment program offered by creditors, credit counseling or debt settlement, rather than intervene on your debt with solutions like bankruptcy which terminate the debt quickly and allow you to resume saving again for retirement.

The calculator solves two problems.

Cost of Payment Plan in Retirement Dollars: This is the value of the retirement funds that you could have invested rather than repay your debt through an extended repayment program.

Future Lost Retirement Value: This is the amount you will lose in retirement from entering into a repayment plan to deal with your debt.

If you want to just see the amount lost from the payment plan, leave the “Monthly Payment After Payment Plan” box at 0.

Here is an example:

Current Age: 25
Monthly Payment: 300
Monthly Payment After Payment Plan: 0
Length of Payment Plan: 5
Rate of Return: 10
Estimated Retirement Age: 70

Cost of Payment Plan in Retirement Dollars = $23,231.12
Retirement Cost of Payment Plan = $1,247,526.55

What This All Means

If you elected to pursue some other solution, like bankruptcy, to discharge your debt quickly, you would not make monthly payments into an extended repayment plan. Those funds could instead be used to save towards retirement.

In this example, if our 25 year old debtor decided to enter into a credit counseling or debt settlement program they would repay their debt but that plan would cost them $23,231.12 in retirement funds that would be worth $1,247,526.55 when they eventually retired.

The purpose of this calculator is to not talk you out of credit counseling or debt settlement but to assist you to make a more informed decision about the future costs to you.

Debt Repayment Impact on Retirement Calculator
Current Age: Length of Payment Plan (Years):
Monthly Payment: $ Rate of Return (%):
Monthly Payment After Payment Plan: $ Estimated Retirement Age:


Current Age: Enter your current age.

Monthly Payment: Enter monthly payment of debt plan.

Monthly Payment After Payment Plan: Enter any payment you expect to make on a monthly basis into your retirement plan after you get out of debt. Leave this as 0 if you just want to see the future cost of lost retirement from a repayment plan.

Length of Payment Plan: Enter the number of years the repayment plan will take.

Rate of Return: Enter the rate of return you anticipate your retirement plan to have. Keep in mind that a good stock index mutual fund can return 10% or more.

Estimated Retirement Age Age: The age you anticipate retiring at.



And if you don’t think worrying about saving for retirement is important, please read The Saddest Avoidable Mistake People Make When Getting Out of Debt.

Advantage Credit Counseling Service is Not Unique

My criticism of Advantage Credit Counseling Service in this article is simply as an example of a larger problem facing the credit counseling industry at large.

In fact the nationally trusted NFCC, which ACCS is a member of, promotes the avoid bankruptcy message. See what they tell creditors:

Credit Counseling Services and the Bankruptcy Conundrum

Counseling provides a unique one-on-one opportunity for an impartial analysis of the customer’s financial situation and a forum in which to ask questions and resolve debt issues. Agency budget counseling programs return rehabilitated customers to creditors. Everyone who comes to a member agency gets free or low-cost help. Help includes a comprehensive budget review — income and debt, assets and liabilities a discussion of options and a plan of action. Our member agencies only give Debt Management Programs (DMPs) to customers who really need them. – Source

The NFCC also says, “Each year NFCC members provide holistic budget counseling sessions to more than 1,000,000 consumers who are trying to avoid bankruptcy and find financial peace of mind.” – Source.

As one bankruptcy attorney observed:

SHOCKING FACT #7: The credit counselors’ stated goal is to help your creditors. The National Foundation for Credit Counselors, the organization that most Consumer Credit Counseling Services locations belong to, makes their mission clear. Their literature states: “NFCC is committed to developing, promoting and maintaining successful relationships with creditors. At NFCC we work with creditors – one by one – to develop policies to make your customer plans successful. Our nonprofit network of more than 1,300 locations returns close to $5 billion to creditors every year. NFCC member agencies help your customers avoid bankruptcy.” The bottom line is simple. The more you pay…the more Consumer Credit Counseling Services make. Whose side do you think they are on? – Source

So where does this all leave us?

There are two huge misperceptions we need to help the public to address:

  1. Do credit counselors provide “best” or fiduciary level financial advice and should future overall financial health be the standard of care?
  2. Should credit counselors provide such advice even when it would limit the number of people who would enroll in their income producing debt management plan?

And as an aside, do you think if credit counselors do not provide fair advice that takes into consideration the future financial health of consumers there intent might be considered unfair and deceptive by the Consumer Financial Protection bureau?

What do you thinK? Share your comments below.

Credit Counseling Services and the Bankruptcy Conundrum
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About Steve Rhode

Steve Rhode
Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.
  • Patrick

    It appears that a “true decisioning engine” that provides all essential elements for a consumer to look at their current and future financial disposition is needed in order to claim sound advice.

  • Fitz

    no “credit counsellor”, certified or otherwise can give BK advice, so how can one honestly advise a person with debt problems without even being able to discuss this obvious potential option? Can’t. Makes me wonder about the certification. While I agree that there is a time for debt management, my personal opinion is that many of these well meaning debt management firms have been co opted by the banks to keep payments coming in over BK. I can certainly be wrong. whether planned of not, that is the net effect. Same with DSCs really. What is music to the collectors ears: pay your bills, don’t file BK. Who’s mantra is this: DMP and DSCs. “Consumer advocates” doing the bidding of banksters. Its the bizarro world all over again.

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