Debt Management Plans: how do they work?
It can be a challenge to understand the differences between debt management, debt settlement, and debt consolidation. There is alot of new terminology to learn, when you are trying to understand the basics of these programs. It is even more difficult to find a source of reliable information on the subject that is trustworthy and unbiased….With that being said, here is a breakdown on what you can expect from a debt management plan.
Most debt management plans (DMPs) are services provided by non-profit credit counseling services (although some companies do charge). These organizations have non-commission based employees that provide financial counseling, planning, and repayment plans. They can also provide a range of services relating to financial planning, debt repayment, housing, and bankruptcy. A debt management plan is a service that involves the negotiation of your unsecured debt with your creditor in an attempt to arbitrate lower interest, fees, and payments. Unsecured debts include things like credit cards, medical bills, or any personal loans not attached to collateral. Your counselor will propose a monthly payment that should be palatable to both you and your creditors. If it is accepted by your creditor, you will usually pay less interest, reduced fees, a lower balance, or lower monthly payments over a period of time until the balance is repaid.
Will Debt Management Affect Your Credit?
A good thing about debt management (as opposed to debt settlement), is that it will not cause damage your credit score. If you work with a debt settlement company, they most likely will advise you to cease contact with your creditors and completely stop paying your bills. This will cause your credit score to plunge in a similar fashion as if you filed for bankruptcy. This is a tactic on their part, to provide you with some leverage when negotiating a settlement with creditor (but, it can backfire if your creditor does not accept the settlement). Once your fico score is floored, a debt settlement agent will contact your creditor with a reduced lump sum payment. A poor fico score might make you look like you are very close to bankruptcy and help with the settlement, but it can be difficult to recover from. With a debt management plan, your creditors are kept within the loop and negotiated with directly as to avoid a damaged credit score, lawsuits, wage garnishments, liens, etc. A footnote will show up on your credit report stating that you have worked with a DMP, but this will NOT cause your actual number to drop AT ALL. This note may make some creditors consider you higher risk, but the actual damage done to your credit should be far less than with settlement.
The Debt Repayment Process
With a DMP, you and your creditors agree to a repayment plan, and a monthly sum that you will pay until the debt is cleared. BUT, before you sign the agreement, you should make sure that these payments are something that you can “honestly” maintain over a period of years. If you can’t hack the payments, it will be much more difficult to renegotiate a second time. So, once you have an acceptable agreement in writing, your debt management company will begin making payments to all creditors on your behalf out of your monthly fee. These repayment plans may take a long time, but once they are finished, the debt will be considered “Paid In Full”. You will also not have to deal with irritating collector calls, because your repayment will be negotiated and agreed on by the creditor. Therefore a collection call should NOT be necessary.
Credit Counselors can Offer a Range of Financial Help
Companies that offer debt management plans may also offer a whole range of financial advice from housing, to debt, to student loans, to bankruptcy. They can look at your financial situation as a whole and come up with a strategy to help you succeed. Advice from a non-profit credit counselor can be good as gold, because they aren’t a commission based business, so you won’t be pressured into or sold services that you don’t need. When you are surviving on limited funds, you need the best advice possible. Legitimate credit counselors should never charge you for information. Some may charge for certain services, but an NFCC or AICCCA accredited counselor will never charge your for financial advice. These companies should even be able to tell you when bankruptcy is more appropriate than their debt management services.
Are there Negatives to a Debt Management Plan?
Compared to many types of “for-profit debt services”, a DMP provided by an approved credit counseling service, may sound like the light at the end of the tunnel. But in reality nothing is “perfect” and you don’t want to get stuck in a debt repayment program that you cannot afford. If your counselor comes up with a monthly payment amount that doesn’t quite sit right with you, don’t be afraid to speak up and try to get a lower payment. You’re the one who is going to have to deal with these payments every month, so work with them until they come up with a number that is practical for you to pay. Your creditors want to get the highest monthly payment that they can get, and you want the lowest. So, before you agree to anything, be sure and allow breathing room in case of unexpected events like car trouble, medical issues, or emergencies. Also remember that not all companies doing debt management are “non-profit credit counselors”. There are some for profit businesses that reduce debt with similar strategies, but take fees based on the amount of debt you have. Certain companies have even tried to pass themselves off as non-profit, when they are anything but. (Check out what the FTC has to say about this HERE.) Before you sign up with any type of debt service you should check out their better business bureau rating and find out if there are other past customers that will give a recommendation.
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