What are credit counseling and consumer credit counseling services?

Credit counseling teaches consumers about credit, budgeting, money management, and debt management. The counselor ensures that consumers can pay off their debts without declaring bankruptcy. Counselors also assist the negotiator, who negotiates with creditors on behalf of their clients to reduce interest rates on outstanding debt. Counselors can offer credit counseling to customers before or after they take on debt. Consumer Credit Counseling Services (CCCS) is a non-profit organization that offers credit counseling services. Some organizations can also be for profit. This type of organization comprises a group of professionals who are skilled negotiators.

Credit-counseling and debt-settlement services

Credit-counseling services

Several organizations offer credit counseling services to help their customers pay off their debts without declaring bankruptcy or liquidating their assets. These clients are the creditors of a third party. Some customers may not be debtors but only attend counseling sessions for financial education purposes. These counseling sessions are not a one-time event but rather a continuous process. Depending on the circumstances, customers may require counseling from time to time. Customers are introduced to a debt management plan based on their debts by credit counseling companies. This debt management plan aims to avoid late payments and the associated interest and fees. Because these are not-for-profit organizations, these counseling services are mostly free or charge a nominal fee, but a few organizations still charge a high price for such services. These services are provided to promote financial literacy.

Debt-settlement services

A person who cannot pay their debts can benefit from a debt settlement program or a debt management plan after seeking assistance from a credit counseling organization. Debt settlement services reduce the repayment amount due to the debtor's financial insecurity. Contacting a debt-resolution company or hiring a financial advocate is not always necessary. Debt settlement can be done on one's own by negotiating with creditors. Many businesses suffered losses during COVID-19, and to recover those losses, some chose debt settlement, while others chose debt consolidation. Credit counseling services include debt-settlement services.

Debt-relief options

The image shows the debt relief options. These include debt consolidation, debt management, debt settlement, credit counseling and bankruptcy.
Debt relief options

The debtor should seek debt relief if he has no hope or means of repaying the outstanding debt within the next five years, despite cutting living expenses, and the amount of outstanding debt exceeds half of the debtor's gross income. There are a plethora of debt relief options available. Choosing a debt-relief option, on the other hand, has consequences. Based on the stage of outstanding debt, the debtor can select an appropriate debt-relief program. The following are a few common methods for obtaining debt relief:

Debt consolidation

Debt consolidation is a popular method among corporates. Whenever some company is not performing well, other companies come forward with a proposal of merger or amalgamation to help the target company reach its financial goals. These buyer companies take over all of the target company's assets and liabilities and evaluate them. Such consideration can take the form of either equity or cash. Debt consolidation can also be accomplished by taking out a consolidation loan and repaying all existing debt. This consolidation aids in the repayment of all debts and forming a new contract with the lender. After paying off all existing debt, the borrower is only required to pay the monthly installments of the consolidation loan as per the lender's contract. Debt consolidation does not help you pay less.

Debt management

Debt management firms are also known as asset management firms. These companies pay off the debt on the debtor's behalf and charge a fee for doing so. Debt-management companies create a debt-management plan based on the customer's financial situation and living expenses. As a result, they assess the amount or proportion of debt that the debtor can repay.

Debt settlement

Debt settlement may or may not be done by the creditors themselves. This method allows both parties to negotiate and decide on a settlement amount, and the creditor does not have to pay any additional fees. Debt settlement is the most effective way for a borrower to pay a lower amount than the actual debt. This method is less preferred because it reflects poorly on the borrower's image.

Credit counseling

A non-profit organization provides credit counseling services. The primary goal of these organizations is to educate people about money. Credit counseling firms negotiate with debtors to agree on a lower interest rate and waive interest. Counseling is usually provided at no cost, but there is a fee for the negotiation.


Any individual or organization whose liabilities exceed their assets and who cannot pay their debts may file for bankruptcy. Bankruptcy is a legal procedure carried out by a court of law. Before filing a bankruptcy petition with the court, any individual or organization should consult with a bankruptcy attorney. Before the debts are discharged, the person in question should hire a liquidator as part of the pre-bankruptcy procedure to prepare a liquidation statement. In this method, repayment is made per the court's instructions. Individuals can be exempt from paying off outstanding debts for the first ten years, except for student loans.

Advantages and disadvantages of debt management plans


The image shows the advantages of  a debt management plan. These include making a single payment, reduced amount of repayment, and saving time.
  • Debt management plans simplify payments for debtors by requiring them to make a single payment to a single creditor rather than multiple payments to multiple creditors in the absence of such a plan.
  • Debt management plans typically include lower-interest repayment and fee waivers. As a result, the debtor ends up repaying less than he would have otherwise.
  • A debt management plan expedites the repayment process, allowing the debtor to save time. The debtor will be debt-free sooner than he would have been if he had not used a debt management plan.


The image shows the disadvantages of a debt management plan. These include the plans not being suitable for all, depending upon creditors and no further use of credit cards.
Disadvantages of a debt management plan
  • A debt management plan cannot be applied to all types of debt. It only applies to unsecured debt, such as personal loans or credit card balances. In the event of outstanding secured debt, the creditor may repossess the debtor's assets.
  • The success of a debt management plan is contingent on all creditors agreeing to participate in such a plan. If a creditor refuses to participate in the debt management plan, debt repayment becomes difficult.
  • If a person chooses a debt management program, they will have to give up any existing credit cards and will not be able to get a new credit card issued in their name. This is done to avoid incurring additional debts.

Context and Applications

This topic is significant in the professional exams for both undergraduate courses & postgraduate courses and competitive exams, especially for:

  • Bachelor in Business Administration (Finance)
  • Masters in Business Administration (Finance)
  • Masters of Science in Financial Compliance and Risk Management
  • Certified Public Accountants

Practice Problems

Question 1: Identify which of the following methods is not a debt-relief method.

(a) Bankruptcy

(b) Debt settlement

(c) Reverse mortgage

(d) Debt management

Answer: (c)

Explanation: Debt relief methods help in reducing the debt burden. Bankruptcy, debt settlement, and debt management help reduce the debt burden and are debt relief methods. A reverse mortgage is a type of home mortgage that increases the debt burden.

Question 2: Identify which of the following measures do not help pay less.

(a) Debt settlement

(b) Debt consolidation

(c) Debt management

(d) Credit Counseling

Answer: (b)

Explanation: Debt consolidation is the process of taking a single loan to repay multiple other loans. Thus, debt consolidation increases the debt burden and does not help pay less.

Question 3: Identify which of the following statements is correct.

(a) Credit-counseling companies are non-profit organizations.

(b) Credit-counseling companies are not non-profit organizations.

(c) Debt-settlement companies are non-profit organizations.

(d) Credit-counseling companies are profit-making organizations.

Answer: (a)

Explanation: Credit counseling companies are mostly non-profit organizations. Debt-settlement companies help in settling the debt of the borrowers. Such companies earn revenue by helping people settle their debts.

Question 4: Identify the correct group for the reverse-mortgage scheme.

(a) All age groups

(b) Only students

(c) Senior citizens

(d) People above 80 years of age

Answer: (c)

Explanation: The minimum age limit for availing reverse mortgage is 62 years. So, it is available for senior citizens.

Question 5: Identify which of the following is not related to debt repayment.

(a) Loan counseling

(b) Reverse mortgage

(c) Bankruptcy

(d) Debt-consolidation loan

Answer: (b)

Explanation: A reverse mortgage does not involve a monthly mortgage repayment. All the other options help in reducing the debt burden.

Common Mistakes

Students get confused between credit rating and credit counseling. They think credit counseling is about how to maintain a good credit score. The second mistake students do they use credit counseling and debt settlement interchangeably.

While studying this topic, it is important to read the following topics to get a better knowledge:

  • Money Market
  • Banks as a source of capital
  • Credit Rating

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