Debt Management Programs
Updated: January 7, 2009
If your financial problems stem from too much debt or your inability to repay your debts, you may consider signing on with a company that offers debt management services or one that offers to negotiate your debt. Here to explain the upside, and downside, of these types of services is Busey Bank`s Susan Abbott:
Q: Is a Debt Management Program the same as credit counseling?
· A debt management program alone is not credit counseling and is not for everyone.
· Consider signing on for one of these plans only after a certified credit counselor has spent time thoroughly reviewing your financial situation and has offered you customized advice on managing your money.
· Even if a debt management program is appropriate for you, a reputable credit counseling organization still will help you create a budget and teach you money management skills.
Q: How does a Debt Management Program work? Does it impact a credit report?
· It shouldn’t hurt your credit score but may make it difficult to qualify for new credit.
· With a DMP, consumers usually get reduced rates, lower payments, no more late fees and fewer calls and letters from creditors.
· When you enroll in a DMP, you write a monthly check to the credit counseling agency and the agency pays your creditors. The plan usually lasts 3-4 years.
· Agencies get operating funds by receiving a % of each client’s payments back from the creditors.
· Typically there is a comment on your credit report stating you’re paying through a credit counseling agency until the account is paid in full.
Q: Why would it be difficult to qualify for new credit?
· Some debt management programs prohibit consumers for applying for new credit while participating in the program.
· Some creditors may see you’re participating and decide you have all the debt you can handle.
Q: Could a consumer do this on their own?
· If you’re current on your bills, you may want to try to negotiate lower payments and interest rates on your own.
· If your situation is more serious or you’re feeling overwhelmed you may want to talk to a debt counselor.
· If you do participate in a debt management plan, be sure to monitor your accounts and bills carefully, to make sure the agency is paying your bills on time. Your credit record is your responsibility. Regardless of how the problems were caused, it is your responsibility to clean them up.
Q: What about “debt negotiation” plans?
· These firms offer a service where they negotiate with your unsecured creditors to accept partial payment. They claim they’ll get creditors to list accounts “paid as agreed” on your credit report but can’t guarantee they’ll get this done.
· Sometimes they will withhold payments to your creditors to “force” them to negotiate.
· Resolving debt through debt negotiation is a long and expensive process. Even if it goes well, you’ll likely end up with a dinged credit record and may owe taxes on the debt that is erased.
