Debt Management Plans
Talk to a Certified Credit Counselor First
Before you enter into a debt management plan, you should first make an appointment with a certified credit counselor. Certified credit counselors go over your income, debt and help you decide the best way to get out of debt. For some, paying off debt is something they can do simply by refinancing or selling personal property. For others, bankruptcy or debt management plans are better options.
If a certified credit counselor suggests a debt management plan, make sure you enroll with a reputable debt management company. The attorney general in your state is a great resource for finding reputable companies because he or she knows the names of companies with complaints or pending fraud cases.
Video: Tips on How to Choose the Correct Credit Counselor for You
The Basics to Debt Management
Debt management plans only help with unsecured debt such as medical bills, college loans or credit cards. You cannot use a debt management plan to pay off your house or car. When you sign with a debt management company, you make a monthly deposit into a bank account. The debt management firm owns the bank account and uses your deposit to pay off your outstanding debt.
The only people who will know you are in a debt management program are those who you choose to tell or companies that your debt management advisor contacts on your behalf. Bankruptcy filings can be public information, but debt management programs are handled with extreme confidentiality.
After discussing your financial situation, the debt management company calls your creditors to discuss payment options. This may include lowering interest rates or eliminating late and/or over-the-limit fees after you’ve successfully been enrolled in their plan for a set number of months or years. Not every creditor will agree to these cost-cutting methods, but a debt management company does what they can to keep your payments as low as possible.
It is important to remember that lowered interest rates or reduced fees only take place after you’ve been enrolled in the plan. They want to receive timely payments for several months before they are willing to renegotiate things like interest rates and late fees.
How Debt Management Affect Credit Scores
Entering into a debt management plan will affect your credit score. Realistically, debt management plans are no different than a Chapter 13 bankruptcy filing. You agree to slowly pay off the money you owe in both circumstances.
Video: How Important is Your Credit Score (Kiplinger)
Things Many People Do Not Realize
Once you are enrolled in a debt management plan, you are less likely to be sued by the company to whom you owe money. Many debt management companies require you to get rid of your credit cards. Using them during the debt management plan puts you in violation of your agreement with most companies.
It can take a while for collections calls to end. However, once a debt management company is working with you, they will tell you to direct any collections calls to your debt management advisor. It’s always a good idea to check your bills and make sure the payments are being made as promised. A typical debt management plan lasts four or five years, so you must continually check to see that bills are being paid and your debt is being reduced.
Sticking with Debt Management Plans
Never enter into a debt management plan unless you are certain you’ll be able to make that monthly payment. If you fail to make your payments, your creditors will increase your interest rates and reinstate fees. In addition, they are less likely to forgive you for late payments in the future. Failing in a debt management plan also makes it less likely that another company will offer you their debt management services. You may be forced to file bankruptcy in a worse case situation.
