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Do credit counselors actually work?

Liz Pulliam Weston is an award-winning, nationally-syndicated personal finance columnist.

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TESS VIGELAND: One of the basic pieces of advice you'll hear from those of us in personal finance is to seek credit counseling if you get in debt over your head. They'll help put you on a payment plan back to financial sanity.

But our friend and MSN Money columnist Liz Pulliam Weston has been looking into the success rates of those debt management plans and she's questioning their effectiveness.

She's here with us and Liz tell us what you found?

Liz Pulliam Weston: What the National Foundation for Credit Counseling told me was that of the people that come through their door, one-third of them just need a single counseling session, they're fine, they go on their way. Another third are essentially too far gone for credit counseling. Either they have too much debt or they have the wrong kinds of debt, because credit counseling is geared to pay off credit card debt. So that leaves us with the final third that actually sign up for the debt management plans. And the failure rate is at least 45 percent.

Vigeland: 45 percent? That means that they never completed, they don't get rid of their debts.

Weston: Yeah. And that is actually kind of on par with what we see with Chapter 13 bankruptcy. What happens or the numbers that we get from the National Foundation for Credit Counseling, they were saying we have a 55 percent success rate, but they were including people who've completed their plans, as well as people who simply called them up and said, "You know what? I'm fine, I'm going to take over from here."

Vigeland: And you can't necessarily track that.

Weston: That's my problem with it. I'd really like to know the breakdown. What percentage of that 55 percent do they know for sure completed their plan?

Vigeland: So what are we supposed to take from that? You have been a proponent of debt management plans, credit counseling, if we're talking 55 percent of a third of the people who come in, that doesn't sound like a real big success rate.

Weston: Yeah, and that's the problem that I have with it. I look not only at the 45 percent dropout rate, but also that other third that's too far gone. And I think the primary problem is that people simply struggle too long and don't recognize when they need to get help, which is a lot earlier than they tend to.

Vigeland: There has to be an irony here though, because the bankruptcy reform that came through, required people to go through credit counseling.

Weston: Yeah, they require a pre-counseling session before you go to bankruptcy, so that you understand your options. And that was pretty much, I think universally acknowledged, as a farce, because so few people at that point have any other choice.

We have this idea in this country that people who file for bankruptcy are frivolous. The reality is, most of the people who file bankruptcy don't even make the median income. They're typically knocked off track by a job loss, divorce, big things that aren't easy to cope with, particularly if you have debt and you have no savings.

Vigeland: Then what should be the role of credit counseling? If it's not working for two-thirds plus of the people who go, what could we learn from that. Is it a matter of recognizing the symptoms earlier and if so, what is that point? It's so hard for people to say, "OK, I've got to get this help. But then if it's too late, what am I going to do?"

Weston: Yeah. And that is a chronic problem. I think people need to know and we need to educate them that you are starting down the path of trouble, the minute you don't pay your credit cards in full every month. If you can only make the minimum payments that's a huge red flag. Or if you're thinking about tapping either retirement funds or home equity to pay off your debt.

On the other side of it, maybe we need to rethink the model of credit counseling. Because credit counseling is structured now, you're trying to pay off all your debt typically over five years. For some people, they just simply have too much debt. Maybe we need to look at more of a debt settlement model; instead of paying back every dime or every dollar of principal you owe, maybe there can be reductions in principal.

Vigeland: But then of course, you run into the arguments of personal responsibility. You ran up that debt, you should have to pay it back.

Weston: Absolutely and that is a strong component of all these arguments and it was a strong component behind trying to make bankruptcy stiffer. It hasn't worked.

Vigeland: Liz Pulliam Weston. As always, so nice to have you in the studio. Thanks for coming in.

Weston: It's great to be here Tess. Thank you.

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