The Pros and Cons of a Debt Management Plan
“What can be added to the happiness of a man who is in health, out of debt, and has a clear conscience?”
-Adam Smith
To get the most out of a Debt Management Plan you need to know the potential upside and the downside. Debt management agencies have a strategy, however, every individual’s financial situation is different. A “one-size-fits-all” approach is non-existent. Unfortunately, there have been many accounts of consumers seeking debt relief who have signed up for a debt management plan without knowing the real score. Some have been dragged further in debt and with more damage to their credit.
Fraudulent or Deceptive Debt Management Companies
The most obvious downside is that some, though by no means all, debt management companies are more interested in making money from you than helping you solve your debt problems. The FTC and some states’ attorneys general have already sued several credit counseling agencies because the companies had deceived consumers about cost, the benefits they offered, or their nonprofit status.
The FTC advises consumers that are engaged in DMPs to be sure to check their bills on a regular basis to make sure that the debt management organization is fulfilling its obligations and paying bills according to schedule. If you pay into your DMP on time, but the organization doesn’t turn the money around to your creditors as scheduled, you could still face penalties and fees and lose the benefit of any negotiated agreement that has been made.
You Have to Stay on Top of Your Debt Management Program
Once enrolled in a DMP it is easy to hand over the reins to the credit counselor and not pay close attention to the program’s progress, and that could lead to trouble. Many money experts like Dave Ramsey warn that not being aware of your debt is what got you into debt in the first place. It is easier to prevent the recurrence of debt problems if you stay on top of what’s being paid every month.
A DMP can make things easier for you, but just writing a monthly check and ignoring what’s going on behind the scenes is a recipe for disaster. You must make sure you get regular updates from your counselor about all recent activities and your month-over-month progress.
What happens if I miss a payment?
It can have a Huge Impact! Once a credit counselor takes charge of your debt management, your only responsibility is meeting the monthly payment. You make the lump-sum monthly payment to the debt management company and they then distribute it to each of your creditors. If you miss a monthly payment, ALL of your creditors do not get their monthly payment. The debt management company does not have any of your funds in reserve for non-payment months. The National Foundation for Credit Counseling’s study showed that 33% of Americans, or 77 million adults, admitted to not paying all their bills on time. Timely monthly payments are serious responsibility. However, they are a small price to pay for having a debt management company negotiate lower payments and interest rates. Your responsibility is to make the monthly payment under a debt management plan.
Can Debt Management Affect My Credit Score
Financial Guru Dave Ramsey has advised that working with a debt management company does affect your credit score. Many companies report to the three credit bureaus that you are using a debt management company. This can impact any future loans or credit checks.
Depending on the strategy you use, your credit also may be negatively impacted by raising your credit utilization rate. This rate is the ratio of your balance to your total available credit. Some credit management programs require you to close some credit card accounts. This lowers your total available credit and increases your utilization rate. Also, by closing out even some of your accounts, you lose the positive credit impact of credit account tenure. In time, though, consistent payments will negate any blemish on your credit report. This is true even those caused by working with a credit card debt management company.
Do Debt Management Companies Charge Fees?
Many debt management companies charge a percentage of the total amount of debt as a payment for their services. This may seem counterintuitive to someone who is fighting to pay off creditors. Creditors fund credit card debt management companies through contributions. This is according to the National Foundation for Credit Counseling. These creditors are the ones participating in the debt management plans. They are also funded by local grants from private sources and foundations. The survival of the debt management company is not completely reliant on people who use debt management services. You must also figure out for yourself if paying a debt management company is worth the money saved on creditors’ interest charges.
Some Creditors Don’t Want to Work with Debt Management Companies
Some creditors initially do not want to work with debt management companies. There are those that are hesitant to strike deals with debt management companies. This means that your debt with that creditor stays as is. That includes all late fees, current interest charges, and blemishes on your credit report. The debt management plan may apply to your other creditors – but not all. You may wind up paying one payment to the debt management company and separate payments to any creditors. These other creditors are those that don’t agree to your debt management company’s negotiated terms.
Now that you have more information and knowledge of the cons of debt management, you can make more informed decisions. It will help you in your pursuit of an arrangement with a debt management company.