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How to find a credit counselor you can trust

A major new law mandates credit counseling for those considering bankruptcy. Jean Chatzky tells how to pick a good counselor.

Last week, I wrote about the Bankruptcy Abuse Prevention and Consumer Protection Act, which goes into effect on Oct. 17.

One of the things it does is mandate credit counseling before entering bankruptcy. That sounds like a fairly easy prescription to follow. But, in fact, the credit counseling industry is a minefield. While there are plenty — I'm happy to say — of counselors who are not in the business simply to rack up fees and rip off already-beleaguered consumers, there are others who are far less scrupulous.

So, this week there will be no beating around the bush: Credit counselors are basically debt collectors in a nicer package. And they serve two masters.

First, they work for you, the consumer, by helping you figure out if a debt management program (DMP) is appropriate for you. If it is, they will arrange for you to pay off your debts at lower interest rates. (How much of a break they are able to net you varies by creditor, and it's pretty much set in stone.) More important for a lot of people over their heads in debt, they'll also arrange for your late fees and other penalties to be wiped away. If you go into a DMP, late fees and other penalties you've assessed will also be waived, which for many clients can be more of a relief than the interest-rate break. In exchange, you will agree to stop using your cards and you will agree not to apply for additional credit. From this point on, rather than writing checks each month to your creditors, you'll make one payment each month (usually electronically) to your counseling firm. And note: You'll pay a fee for this — generally about $50 up front and $25 a month thereafter.

Second, credit counselors work for your creditors. For collecting your debts and turning the money over to your creditors, your counselor earns a rebate on that money (in the industry it's called a "fair share contribution"). That means that, although they have an interest in helping you stick with the program and pay back the money, they also have an interest in seeing your creditors get paid.

So here's the big question: How do you know if a counseling organization is credible? Having not-for-profit status is a good start, but it's not enough. Check the Yellow Pages to see that the organization is recognized by the Better Business Bureau, then call the BBB to make sure there is no history of complaints. Finally, ask the firm if it's a member of the National Foundation of Credit Counselors or the Association of Independent Consumer Credit Counseling Agencies. Both use only certified credit counselors.

When you've narrowed your list, ask the counselor or the intake person who answers the phone these questions to decide whether it's a go or a no-go:

Question: What do you do?Go: "We'll evaluate your financial situation to see what sort of solution is right for you." The counselor can't know whether your finances are appropriate for a DMP until he or she has been through them. Your situation might be good enough that you can work through it on your own — or so bad that a DMP won't help and you need a bankruptcy attorney.

No-go: "We 'consolidate debts' or put people on 'debt management plans.'"

Question: How much time will you spend with me?Go: "An hour. Maybe a little more."

No-go: "Oh, we'll be done in 20 minutes."

Question: What kind of debt do you help people with?Go: "All kinds of debt; we even have a housing counselor on staff who can help you deal with your mortgage." You don't just want a counselor to deal with your credit cards if your car loan, student loan and mortgage are causing you worry as well.

No-go: "Just credit card debt."

Question: How much will this cost?Go: "Around $50 up front. Our monthly payments are on a sliding scale, but you won't pay more than $35 a month."

No-go: "More than $75 up front. More than $35 a month."

Finally, what if you're not considering bankruptcy? When is credit counseling a worthy endeavor for its own sake? Think about it if you're using one credit card to pay off another, frequently take cash advances because you don't have cash, have been turned down for an increase on your credit limit or can't even get a grip on how much debt you have.

Jean Chatzky is the financial editor for “Today,” editor-at-large at Money magazine and the author of “Talking Money: Everything You Need to Know About Your Finances and Your Future.” Her latest book, "Pay It Down: From Debt to Wealth on $10 a Day," is now in bookstores. Copyright ©2005. For more information, go to her Web site, .