Consumer Credit Counseling

I have been reading your blog over the past couple days and I am impressed and encouraged that there are still resources like this available. 

My situation is this, I had a great job making a very good living, bought a nice house and had two great kids.  The company changed hands and so did my great job.  In the 4 years since I was able to earn an MBA, and have a good job with a great company.  Unfortunatly I am still not making the level of income that I had in the past and I have exhausted all my resources to bride the gap. I am literally 6-9 months away from a promotion that will restore my financial equilibrium.  But for now, I am on the brink of falling behind, and have had 2-3 late payments on my second mortgage.  I have been close to being late on my First, but have never gone over 30 days.  I have a couple of medical collections that I am trying to settle from being int he hospital 2 years ago, which also caused me to be out of work for 2 months.  I tried to refi my second for more cashout of my home, but was turned down because my FICO was 570.  I have 5 credit cards and a personal loan that total about $45k. 

Based on your experience, what options are available?  Would the holder of my first ever consider allowing interest only payments for a period of time, such as 6-12 months?  My second mortgage holder did offer to reage my account so I could skip a payment and get caught up.  Is that a bad move?  What effect would working with a good credit counciling service have on my credit score? 

I hope I am providing enough background to help you offer some direction.  I feel like I can finally see the light at the end of the tunnel, but fear I may end up a day late and a dollar short.

George

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Hey George,

Yes, absolutely take the second mortgage holder up on their offer to re-age.  The payments on your first mortgage and second mortgage [both secured loans] should be highest on your priorities of debts.  Ideally, the medical collections should be settled through a pay for delete, although for now, the medical collections should be lowest on that totem pole.  So, if at this time, there are only so many beans to count out each month, what is the best strategy?

If after forgoing payments on the medical debt and credit cards, there’s not enough left to pay the mortgage payments, then forbearance is a viable option.  You’d have to push past the collection department to get to loss mitigation.  In addition, it doesn’t sound like you are at that breaking point – you’re trying to make an all-encompassing budget.

One of my concerns would be that the credit cards might increase your APR through a Universal Default clause.  In this regard, it’s possible a credit counseling company might offer some relief.  I’ll admit, I’m generally not a fan of credit counseling services.  Even so, I should probably make a distinction between different types/aspects of credit counseling.

First, Fair Isaac’s scoring model does not penalize a borrower for enrolling in a Credit Counseling service.  This is somewhat misleading.  The notation clearly visible on a credit report regarding “credit counseling” is not factored into the score, but the individual tradelines do not typically reflect the lower payments negotiated by the counseling service.  In other words, your credit report reflects continued late payments despite your on-time payments each month to the credit counseling service and this in turn, trashes your credit score. 

Now, as to the different types of credit counseling services.  It’s important to note that not all non-profits are created equal.  What’s worse is that not all non-profits are even non-profits.  The IRS has, in the past, given a 501(c)(3) designation to any entity seeking ‘non-profit’ status.  The problem is that many companies, including those in the Credit Counseling arena, have applied for non-profit status and yet, they do not act as non-profits – on the contrary, they act as profit-making enterprises.  One of the key factors in distinguishing between a ‘good’ or ‘bad’ credit counseling company is in how much of the non-profits’ efforts are involved in educational programs and charitable work.  The majority of not-so-non-profit-credit-counselors advertise aggressively and stick every consumer into a Debt Management Plan (DMP).  The DMP may charge a set-up fee and monthly administrative fees.  In addition, the credit card companies may donate a kickback (for lack of a better word) to the credit counseling company based on the amount that is collected.  Credit counseling companies were first created and funded by banks in the credit card industry.  With consumer revolving debt approaching nearly a trillion dollars, many unsavory profit making companies have entered into the credit counseling industry looking to collect set-up fees from consumers and kickbacks from the credit card companies.  The credit card industry’s response was to cut back on the kickbacks (‘fair share’ I believe is the terminology the credit card industry uses) and lobby for oppressive bankruptcy laws.  It appears they were successful and now we have a mess and I’m probably going off on a tangent now so I’ll get back to your question.

Credit counseling could be an option if you find the right credit counselor.  In addition to the above, some key factors would be whether or not each and every individual credit card company will work with the credit counselor (many do not), how they will report their tradline, what interest rate/re-aging concessions the credit card will offer, and whether or not fees are wasted for setting up a DMP.  In general, I am a believer in consumers doing their own budgeting without a credit counselor and if bankruptcy is a realistic option, then never hesitating to advise a creditor that their stubbornness and reluctance to work out a reasonable solution might get them named in the petition.

George, I don’t know how well I’ve answered your question.  I do see that you’ve earned an MBA.  If that involves student loan payments, then you may qualify for an economic hardship deferment (granted for one year at a time, maximum of three years) or forbearance and/or, at minimum, a “reasonable and affordable” payment plan.

Thanks for the questions and hope this helps.

Paul