Many Americans who experience difficulty repaying what they owe seek assistance from nonprofit credit counseling agencies to help manage their debts. This study examined the effects of credit counseling and debt management on financial management behaviors and financially stressful events. Consumers who continued in a debt management program for 18 months reported improved financial management behaviors and experienced fewer stressful events than consumers who did not remain in the program.
In 2003 more than 1.6 million people declared bankruptcy (American Bankruptcy Institute, 2004), and in the previous year about 9 million sought the advice of credit agencies regarding management of their money (Bayot, 2003; Loonin & Plunkett, 2003). Overspending and excessive credit usage prompt many persons to seek credit counseling or declare bankruptcy, but millions encounter financial difficulties because of unemployment, loss of overtime, bills for uninsured medical services, and marital separation or divorce (Sullivan, Warren, & Westbrook, 2000). Consumers contact credit counseling agencies to control their debts.
A debtor may benefit if the credit counseling agency could negotiate with the person's creditors to lower interest rates and eliminate other penalty fees by putting the person on a debt management program (DMP) (Bayot, 2003). A DMP is a creditor-approved arrangement that provides an individual with a plan for paying off his or her unsecured debts by consolidating those debts into one monthly payment disbursed to creditors. However, a DMP is not appropriate for all consumers with debt problems. Also, usually it takes consumers 3 to 5 years to pay off their debts on a DMP, and many drop out of these programs (Bagwell, 2000; Consumer Reports, 2001). Furthermore, there have been criticisms leveled at the industry for alleged abusive business practices and profiteering (Loonin & Plunkett, 2003; U.S. Senate, 2004).
Despite these recent criticisms, little is known about credit counseling clients. The commonly available information is limited to clients' anecdotal testimonials. The purpose of this study was to explore the effects of credit counseling and debt management on financial management over an 18-month time period.
Typically, credit counseling agencies provide consumers with income, debt, and expense analyses via telephone or face-to-face conversations ranging in duration from 15 minutes to an hour or more. For consumers who qualify, a DMP often is recommended.
Revenues to operate a credit counseling company come from two sources. First, clients typically are assessed setup and monthly process fees. The second source is "fair-share contributions" from creditors. Today, most creditors have reduced their fair-share contributions, on average, from 15% to 8% (Loonin & Plunkett, 2003). Therefore, credit counseling agencies have increased fees charged to consumers, and some have reduced their education and counseling efforts.
Although the credit counseling industry has expanded greatly over the past decade, limited research has been published about clients. Not all credit counseling clients are successful. According to the agency statistics and client profile of the National Foundation for Credit Counseling (NFCC, previously the National Foundation for Consumer Credit), 273,473 DMPs terminated in 2002; among these clients, almost half (47%) simply stopped paying, 4% declared bankruptcy, 21% decided to self-administer their own repayment plan, and 21% successfully completed the plan (NFCC, 2003).
A few studies have shown that credit counseling has positive effects. Staten, Elliehausen, and Lundquist (2002) focused on credit counseling clients who received only budgeting and counseling advice. Data from credit reports were collected 3 years after clients' initial budgeting and counseling sessions. Counseled borrowers had …