Sometimes people just owe too much. Charge this, pay for that later.

There's not a lot necessarily wrong with that, but anyone will tell you that if your debt payments begin to get out of hand -- or that paying the minimum each month on all of your credit accounts is all you can afford -- then usually it takes just one out-of-your-control event to keep you from paying your bills on time.

Usually such events include an extended illness, the loss of job or a personal emergency. In such circumstances, what about those companies that advertise to help you with your credit balances, organizations generically called Consumer Credit Counseling Services (CCCS)?

Go ahead, look in the phone book or surf the Internet. You'll be surprised at just how many counseling services there are, many willing to reduce all your payments to one low monthly amount. Sounds good, doesn't it? But you need to know the details and the impact such services can have on your credit -- and your wallet.

First, note that some of these companies may be legal firms soliciting borrowers in trouble for a Chapter 13 bankruptcy. Unlike a Chapter 7 personal bankruptcy which absolves you of your debt, a Chapter 13 keeps your debt intact but makes monthly payments to a third party, or trustee, who will disburse your funds to the various creditors every month until your debt balances are paid.

A consumer credit counseling service does not typically help you file for bankruptcy. Instead, these companies contact your current creditors and renegotiate either the remaining balance, interest rate or both on your behalf.

Why would creditors do that? When a CCCS contacts a creditor, many times it's the last resort before a consumer files for bankruptcy, wiping the debt out entirely. Creditors know this, and may in fact renegotiate to actually get something from the consumer instead of nothing.

Let's say you have ten credit accounts totaling $50,000 and your interest rates for all are over 20 percent. A CCCS will review your situation and work out a budget for you. Monthly payments for food, shelter, clothing, transportation, daycare, insurance...everything is analyzed. Then, a monthly budget is set for you to follow which includes one lower payment, made out to the CCCS each month to gradually pay off your outstanding balances.

So who pays for these services? The consumer can pay a small amount each month directly to the CCCS for some of the income, but the bulk of their income comes from the creditors themselves. The CCCS may also negotiate with the creditors themselves for fee income.

In some cases, the CCCS will collect the entire first payment made to them as a fee for their services. The problem here is that the consumer may not understand that a fee is being paid and, also, the CCCS fee is not reducing the consumer's debt.

The bottom line: Be an informed consumer, ask about fees, and ask especially about how each and every payment you make will be applied to your debt. Ask for references, and check with the Better Business Bureau and Chamber of Commerce before signing up.

Also, it's important to mention that when applying for a mortgage some lenders will view a consumer in credit counseling negatively, and the credit report may in fact reflect that information. Further, creditors themselves may report that the original balance was renegotiated, leaving an ugly mark on a credit report. If you feel you've gotten over your head in bills, by all means, take advantage of all the help that's available. Just be sure to understand the impact a CCCS may have on your future credit report.

For more articles by David Reed, please press here.

Published: February 1, 2002

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