How Debt Management Can Help You
Overcome by a heavy debt burden, you may assume bankruptcy is the only solution. What you may not know is there are other strategies to manage your debt without filing for Chapter 7. One possible approach is to enroll in a debt management program.
What is a debt management program?
Essentially, in a debt management program, a debt management company, typically a nonprofit organization, negotiates on your behalf with your creditors. The debt management counselors aim to lower your interest rates and/or slice your debt payments to one reasonable sum each month. In exchange, you pay the debt management company monthly. In turn, the company disburses the money to your creditors. Under a debt management plan, the total principal you owe remains the same.
What are the advantages of working with a debt management company?
There are three major advantages to undertaking a debt management program:
- You reduce your debt obligations to a single affordable payment each month.
- You avoid paying late fees.
- You will no longer be disturbed by debt collection calls.
What are the disadvantages to working with a debt management company?
Though a debt management plan sounds like an ideal resolution to your debt problem, you should be aware of several disadvantage that come with it. Such as:
You may be paying the debt management company for a long, long time. Debt management plans typically extend for three to five years. Since the debt management company will request you close all your credit accounts and don’t open any new ones during that time period, you must control your spending so you don’t plunge into more debt. (However, sometimes the debt management company permits you to keep one credit card for emergencies or business expenses.)
Your credit rating may take a hit — at least in the beginning. Simply enrolling in a debt management program doesn’t automatically erase or upgrade a bad credit score. Also a prospective employer, landlord, or even lender may question why you needed a debt management plan. It could be considered a blot on your credit history. However, the good news is as you pay down your debts, your credit rating improves. By the end of the program you will be debt free and have a significantly higher credit score.
You can do it yourself. Instead of paying a debt management company, you can negotiate directly with your creditors to lower interest rates and reduce monthly payments. However, a debt management company is there to negotiate with your creditors on your behalf and with their expertise, get you the best plan possible.
Finally, debt management plans are best suited for unsecured debt, such as debt from credit cards, medical bills, or debts not backed by some type of collateral like a home mortgage or car loan. Yet some of the better debt management companies will include secured debt in the debt management plan even if they cannot whittle down interest rates or payments. In general, debt management plans work best if you are truly struggling with high-interest rate debt and cannot make the minimum payments each month.
What should I look for in a debt management company?
Before selecting a debt management company, do your research. Here are some points to consider:
Go with an accredited company. The most trustworthy debt management companies are accredited by several organizations, including the National Foundation for Credit Counseling, the Association of Independent Consumer Credit Counseling Agencies, the Council on Accreditation, the International Organization for Standardization, and the Better Business Bureau. Also, find out how long a company has been in business. Companies with a long history are more likely to follow respectable practices. Although there are reputable for-profit debt management companies, non-profits are held to stricter standards and oversight. All things being equal, a non-profit may be the better choice.
Check out fees. State regulators cap debt management company fees. Nevertheless, a debt management company may charge a lower fee than mandated or waive the fee if you cannot pay it. So, always research fees before signing up with a debt management company.
Ask about security protection. In today’s hack-crazy Internet world, hackers can easily access individual financial information. In devising the debt management plan, you’ll reveal sensitive details about your finances. Therefore, inquire about the company’s security protections. In addition, request the debt management company only divulge your information to your creditors.
In general, the best debt management companies are transparent about their offerings and fees; provide top-notch customer service and credit education; and even offer a free credit consultation.
So if you’re feeling overwhelmed by your debt and prefer the help of an outside party, you may find your salvation with a debt management company. As with any financial decision, thoroughly research your options before signing a contract. In addition to lessening your debt load, you’ll receive valuable financial advice in the process that can keep you debt free in the future.