DEBT Management

Dwindled with a bundle of loans to repay, yet no money to do so? All the promises of reducing monthly payment coming over the ads on TV and email, could they be worth a try? If you are thinking of considering such a service, get the story behind the magical promises first.

These sales pitches that have got you convinced are not coming from any government regulated legitimate agencies. The advocators of these are credit counseling agencies which populate an industry that is not regulated till date. Yes, the Debt Management Companies are mandated to hold a license, but the debt management market overall is not regulated by government. And with the new law coming that requires people with crushed credit balance to get credit counseling before they can file for bankruptcy, things are about to get messier for consumers.

These Debt Management Companies, promising to pay back all you loans, are not always reliable in the sense you take them for. There are companies that could be able to help you, mostly nonprofit Credit Counseling services having an affiliation with National Foundation for Credit Counseling. But these organizations will suggest you to get credit counseling first instead of pushing you towards a debt management plan.

Debt management plans (DMP) promise to get a reduction of interest rate and elimination of some charges lowering your monthly payment for unsecured debt. The Debt Management Companies go through your income, liabilities and expenses in order to find out what kind of a deal they can cut out for you. This amount, you start to pay to the DMC instead of paying to your creditors. But the plan is not worth to try if it doesn’t clear up your debt in next five years. And once you sign up for the program, all the creditors will close the accounts you are consolidating to the DMP and you won’t be able to apply for new credit. The reduction in your credits will also affect your credit rating. These are apparently visible side effects of applying for a DMP, but there are factors DMCs don’t want you to realize unless it’s too late.

DEBT Management

·         Everything has a price:

The services that DMCs provide, they get a cut of the collected money from the creditors. But in most cases, this is not much, which leads the companies being dependent on the fees they charge the customers for the service. These are what some of the fees range from. Counselling session charges are about 14 bucks minimum, minimum for setting up an account is 19 bucks, and monthly service fees is 12 bucks. These are the only legal charges a DMC could ask a customer for. So other than these three charges, if any company asks for application or membership fees or upfront payment for the service in the name of voluntary contribution, you need to steer clear of those DMCs.

Also remember a nonprofit DMC is not necessarily cost saving and to be trusted. Most DMCs reorganize them as nonprofit to better qualify for consumer needs.

·         Assess the repercussions:

While a debt management plan could help in bettering your credit score in the long run, in the short run they do exactly the opposite. Your credit accounts will take a major hit and since most of them will be closed, you won’t be able to get competitive rates while buying a house or a car and neither could you be applying to get a new unsecured loan. So take account of your future expenses for up to 5 years till you apply for a debt management plan.

·         Understand the contract:

If the contract you are signing is beyond your understanding, you should not go into the deal. Contracts should be clear about what fees you are paying to the agency for getting the plan and how long will it take for the agency to pay back your complete debt. Better yet, compare contracts from more than one DMC to get the best out of the deal if you have to.

·         Consider Bankruptcy:

This is not always a bad thing. Even legitimate credit counseling agencies will advise you to opt for bankruptcy instead of going for a long credit management plan. Yes, bankruptcy will damage your credit scores and it will stay in your credit history for 10 long years but the debt management plan also damages your credit score badly and stays in record for 7 years afterwards. To add with that, in bankruptcy, you will get certain charges waived by the court, but DMPs require you to pay in full plus some extra, so decide which could be a better option for you. Bankruptcy could be the fresh start you need.

·         Make sure your payment is going to the right place:

Even though you have opted for a DMC, your concern is still that your creditors get paid in order to reduce your credit. But some DMCs keep the fees for themselves for first few months before your creditors even start seeing a penny. Check your statement that your creditors are getting paid per month unless you want them to send penalty fees and bad credit rating for late payment. You would end up with even worse credit situation than you were in before.

·         Credibility of the DMC:

Find out what the attorney general’s office and local consumer protection services has to say about the company before you sign up for a program, and don’t opt for a company which hasn’t been in business for less than 5 years. Some DMCs fall out often because DMCs are reliable on the commission they acquire from the customers, which is illegal. This sometimes causes DMCs to go belly up; this means all your money will go down with the DMC.