Debt counseling, most commonly known as consumer credit counselling is a process offering education to consumers about how to avoid incurring debts that cannot be repaid. This process is actually more debt counseling than a function of credit education. Besides providing debt counseling education, a debt counselling service does involves negotiating with creditors to establish a debt management plan (DMP) for a consumer sot that the debtor can follows the plan to clear his/her debt and become debt free in a projected period according to the debt management plan.

In 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 made debt counseling a requirement for consumer debtors filing for Bankruptcy in the United States. In order to meet this requirement, during the 180-day period preceding the filing of bankruptcy, the debtor must complete a program with an approved non-profit budget and debt counseling agency. Such a program may include, but is not limited to, one counseling session conducted by phone or over the internet. In addition, a post-filing debtor education debt counseling session is required in order to complete the bankruptcy process and to have your debts discharged.

Common features of Debt Management Programs

Most debt counseling services will include debt management programs for debtors, but the DMPs are optional, it's up to the debtor to choose whether they want to enroll into the proposed debt management plan, which is advisable for heavy debtors, or they can choose not to sign up the plan.

If a debtor choose to join a DMP, his accounts will be closed and be restricted for future changes. The most common benefit of a DMP as advertised by most agencies is the consolidation of multiple monthly payments into one monthly payment, which is usually less than the sum of the individual payments previously paid by the customer. This is because credit cards banks will usually accept a lower monthly payment from a customer in a DMP than if the customer were paying the account on their own. Some DMPs advertise that payments can be cut by 50%, although a reduction of 10-20% is more common.

A second benefit offered by debt counseling agencies is the process of bringing delinquent accounts current. This is often called "re-aging" or "curing" an account. This usually occurs after making a series of on-time payments through the debt management program as a show of good faith and commitment to completion of the program.

The third feature of a DMP is a reduction in interest rates charged by creditors. A customer with a defaulted credit card account will often be paying an interest rate approaching 30%. Upon joining a DMP, credit card banks sometimes lower the annual percentage rates charged to 5-10%, and a few eliminate interest altogether. This reduction in interest allows the counseling agencies to advertise that their customers will be debt free in periods of 3-6 years, rather than the 20+ years that it would take to pay off a large amount of debt at high interest rates.