Debt management plans (DMPs) can help reduce your monthly payments, reduce or eliminate late fees, lower interest, and improve your credit, but it’s not a hands-off process. When signing on to a DMP it’s important to stay actively involved in the process from start to finish to achieve the most successful results. Below is a list of helpful tips to ensure your debt management plan stays on track and that you’re maximizing the benefits.
Late Payments Can Cancel Negotiated Deals
Debt management companies and credit counselors can negotiate with your creditors, and often have standing agreements with them that allow for reduced interest, waived late fees, and re-aging of accounts. However, it is vital that you hold up your end of the deal and make payments on time, every time.
Under normal circumstances with a credit card account, if you make a single late payment the consequences are minimal; you pay a late fee and try to do better next time. However, when you have entered into a negotiated schedule with a DMP, if just one payment is late the creditor is likely to revoke the deal, reinstate all those late fees, and raise interest to an even higher rate than it was at before.
What If Your Debt Management Provider Goes Out of Business?
While very unlikely, it is possible for your debt management company to go out of business. Don’t panic, but quick action is required. If your debt management company closes, the FTC advises you to contact your bank immediately to stop payments on any checks made to the debt management company and terminate any automatic withdrawals they have set up.
Next, it is critical to preserve any progress the DMP has already made by making payments directly to each of your creditors and telling them the debt management company has gone out of business. If the DMP failed to make any scheduled payments for which you had already deposited money, you could risk losing your negotiated deals with your creditors, so you need to act immediately before being hit with interest hikes, fees, or lawsuits.
Two Sides of Debt Management Plans: Paying Bills and Restoring Credit
Remember that a debt management plan involves two goals, one short-term and one long-term. Your short-term goal is getting on a regular payment schedule, negotiating interest and late fees, and trying to get current. The long-term goal is to repair your credit.
It is very difficult for both goals to be reached simultaneously, and in the short run it is likely that your credit could be negatively impacted. Don’t let that prevent you from participating in a DMP. Chances are that if you are starting a DMP your credit is already pretty bad, and losing a few more FICO points isn’t going to matter that much. Before you can work on improving your FICO score, you need to work on getting control over your debts.
DIY Versus Using a Debt Management Company
Some people have been very successful in doing their own negotiations and DIY debt management, but it can be a complex and lengthy process. A great advantage of using a debt management company is that they often already have standing arrangements with many credit card companies, which makes for faster results.
Whether you use a service or do it yourself, it’s still a good idea to understand the process. Two good debt management resources are the book Reduce Debt, Reduce Stress by Gerri Detweiler, Nancy Castelman, and Marc Eisenson, and Nolo.com, a noteworthy legal self-help publisher.
Don’t Give Creditors Access to Your Bank Account
It is very important to never, ever give creditors access to your bank account. They will plead and cajole to get you to give them a check over the phone, set up an automatic monthly debit, or set up a post-dated auto-withdrawal. Don’t ever do any of these things.
Such agreements take control out of your hands. By letting them withdraw funds on their schedule instead of yours, you lose control of your bank account and risk becoming overdrawn. That can expose you to a torrent of bank fees and overdraft charges in addition to your creditor’s late fees. Also, if the creditor or collection agent is less than legitimate, they could hit your account for more than you agreed to pay or cash your post-dated check ahead of the date.
Realize that debt management is a process that takes time, but if you stay in control of your own financial destiny, you will succeed, get out of debt, and improve your credit.