Do It Yourself Debt Management Plans – Good or Bad Idea?
Although consumers have many options for resolving past due debt, one solution, the debt management plan (DMP), is often preferred even though it is typically the most costly option for consumers. The reason: it is well-marketed by “non-profit” credit counseling agencies that receive much of their funding from the large creditors, such as banks and credit card companies.
Smart consumers ignore the shrill sales pitches and examine their financial options logically and accurately, and they seek advice from many sources.
Why a Debt Management Plan?
The debt management plan’s appeal is straightforward – it reduces your monthly debt payments. According to the sales pitch of the National Foundation for Credit Counseling (NFCC), the industry’s largest and oldest trade association, consumers “benefit from reduced or waived finance charges” that counselors extract from creditors.
In fact, payments are often reduced more by lowering minimum payments and extending payment terms, changes that could increase your long-term costs and do not reduce you debt quicker. If you are trying a DIY debt management plan and are inexperienced in credit counseling and the legal language of credit terms, negotiating such debt management waters is risky and unlikely to produce better terms than the credit counselor would obtain.
For consumers who have the ability and willingness to repay all debts owed, given time, a debt management program is effective. However, compared to other debt resolution options that reduce, eliminate, or suspend debt payments, debt management plans are more expensive. Furthermore, if your ongoing ability to make debt payments is tenuous, a debt management plan may merely delay an inevitable default and cost you more in the long run. Consumers need to realistically assess their ability to repay debt agreements, and then consider all available debt resolution options, including debt settlement, debt consolidation, and bankruptcy.
Can a DIY Debt Management Plan Salvage Your Credit Score?
Many consumers pursue a debt management plan, and pay its higher costs, in the hopes of minimizing any negative impact on their credit scores due to late debt payments. While Fair Isaac Corporation, the publishers of the industry-standard FICO credit scores, states unequivocally that having debts in a DMP does not impact one’s credit score, the reality is that creditors can designate on your credit report that debt is being repaid pursuant to a DMP, with the result that new credit can be very difficult to obtain regardless of your credit score. Obviously, most consumers in a DMP should not be seeking to add debt anyway; however, some investment decisions, such as buying a house, cannot wait, and consumers should be aware of the impact of a DMP on one’s access to credit.
Consumers take an average of 3-5 years to complete a debt management program. Once completed, you should have better access to credit and better chances of building your credit score. On the other hand, a bankruptcy takes only a few months to complete; however, it remains on your credit report for 7 years.
What You Don’t Know About Debt Management Plans Can Hurt You
Depending on the resolution strategies you incorporate in your debt management plan, tax benefits could accrue. For example, if you used a home equity loan to consolidate debt, the interest and any origination points paid on the loan can be written off to reduce your taxable income. If you are attempting a DIY debt management plan and are not a trained financial planner or debt consolidation professional, you may miss opportunities or even obligate yourself to years of higher tax bills.
A do-it-yourself debt management strategy could result in important details being overlooked, due to inexperience – details that possibly cost you money and points on your credit score. Your debt management plan should encompass all outstanding unsecured debts. If you omit accounts from the plan, your monthly debt payments will be higher than budgeted, and your credit score will not receive the highest rating. A debt professional is expert in forensic analysis of your financial history to ensure even long forgotten accounts are identified and included in the resolution plan.
You Must Change Behavior to Achieve Long Term Goals
Though well-intentioned, many consumers trying do-it-yourself debt management without the supervision and guidance of a credit counselor will not have the discipline to stay on a debt management program. Depending on the terms of the plan, one late payment may be deemed a sufficient enough reason to cancel the program or reinstate higher interest rates or fees.
Worse, without review and enforcement of your monthly budget by a counselor, you could be tempted to return to the undisciplined spending and borrowing that precipitated your debt crisis.
Conclusion – Debt Management Expertise is Everything
An effective debt management plan can involve many creditors and complicated legal issues that require specific expertise to negotiate and document. Attempting to “do it yourself” is unwise for all but the most knowledgeable debt professionals and poses significant risk of financial loss, lost opportunity, and enforced obligations to the typical inexperienced consumer.
Instead, seriously consider other resolution options that produce greater debt reduction or secure more of your personal assets, and seek the help of a professional.