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10 Things You Should Know About Debt Management Programs

Debt management (also called credit counseling) is a booming industry these days as more and more consumers drown in credit card debt. With ads promising easy debt relief, these programs are tempting to anybody struggling to stay on top of debt. But are they legit? Will they help you or hurt you? Here are 10 things you need to know before working with a debt management agency—both pitfalls to watch out for—but also benefits you can expect.

Points to Watch Out For

1. Don’t Be Fooled By Non-Profit Status – Many debt management companies may be organized as a non-profit business—a fact they are eager to share to make it look like they are on your side.

The truth is these companies are still in business to make money; they may just distribute their earnings differently than a for-profit corporation. Debt management companies do charge for their services, usually as a modest monthly fee.

2. You May Be Able to Do It Yourself – Much of what debt management companies do involves simply contacting your creditors and negotiating alternative repayment plans, hopefully with reduced interest rates and fees. If you are struggling to make payments, you can usually do this yourself. Most creditors will be eager to help you meet your debt obligations because they want to help you avoid bankruptcy, which sucks for them. Talking to your creditors directly isn’t pleasant, and it may not be easy, but it can be done.

3. Your Credit Score May Drop – A lot has been written about how debt management programs hurt your credit score. That is not always the case. If you have several late payments or are currently way behind on any credit payments, chances are debt management may actually improve your score.

If you have loads of debt but are current on all your payments, your credit score may drop when you enroll in debt management. That’s because as your debt management company renegotiates your credit obligations, they may change when payments are made to creditors, resulting in late payments being reported on your credit history. Additionally, many creditors will close your accounts while you are in debt management, and good history you have with those accounts will be taken off your credit history.

Regardless of whether your credit score goes up or down in the short term, enrolling in a debt management program is a long term decision, and the fact is repaying your debts is the best thing for your credit score. It is certainly better than continuing to be late—or not paying at all.

4. You Must Give Up New Credit – Once enrolled in a debt management program, you will be prohibited from opening new lines of credit. If you do, you will risk the benefits your debt management program has negotiated for you. While not opening new credit is generally the best move for you while you are trying to get out of debt, make sure you do not anticipate needing an auto loan, for example, during your repayment period.

5. It Doesn’t Take Effect Immediately – Once you have been enrolled in a debt management program, it can take a month or before your creditors receive their first payment. This can mean two things.

First, if you want to avoid late marks on your credit report, you will need to make at least one month, possibly two months, of “double payments”: one payment to the debt management service and your regular payments directly to your creditors. Since most people cannot afford this, you must be prepared for the possibility of getting a late mark on your credit report.

Second, you may receive collection calls from your creditors before they receive their first disbursement from the debt management agency. Unfortunately the debt management agency cannot stop collection calls, but most collectors will be satisfied when you tell them you have enrolled in a program and will leave you alone once you inform them.

Benefits to Expect

6. Your Interest Rates Will Go Down – Once your debt management company makes contact with your creditors, most creditors will immediately lower your interest rate by several points, typically to a rate between 12% and 16%. This can be a huge help if you are paying 17% or more, and especially if you have been late on one or more accounts and are paying a default APR of 20% or more. These reduced APRs can save you thousands of dollars.

7. Fees Will Be Waived – Your debt management company may also be able to get your creditors to eliminate future late fees that might be incurred as creditors adjust your payment schedule, saving you as much as $40 per creditor each month.

8. You Will Have One Monthly Payment – One simple benefit of a debt management program is the ability to consolidate your debt payments into one monthly payment. (The debt management service then distributes your payment to your creditors).

9. You Avoid Bankruptcy, But Retain the Option – Nobody wants to declare bankruptcy, and it is true debt management provides a viable alternative to becoming legally destitute. However, enrolling in debt management or credit counseling is actually a prerequisite to filing bankruptcy. So even if you find yourself still unable to pay all of your creditors, bankruptcy is then an option for you after you have tried debt management.

10. Your Debt Will Be On Autopilot – Once you have enrolled in a debt management plan, and if you let your debt management plan pay all of your creditors each month, you may never have to worry about your debt again. Your payment is auto-debited from your bank account, and your debt will be gone in just a couple of years. Of course, it is smart to allocate more money to your payments whenever you are able, but that is just a matter of logging onto your debt management company account page and increasing your payment.

If you think a debt management program could help you, I encourage you to get all the facts and do your research before you sign up for any program! These programs are a lifesaver for some, but for others they can do more damage than they do good. One company I have had personal experience with is CareOne Credit Counseling.

Have you or someone you know used a debt management agency? What was your experience? Did they help?

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About David Weliver

David Weliver is the founding editor of Money Under 30. He's a cited authority on personal finance and the unique money issues we face during our first two decades as adults. He lives in Maine with his wife and two children.

Comments

  1. CareONE does not actively engage creditors to lower your payments and/or APR. Call the credit cards agencies yourself you can negotiate with them without the fees associated with so called credit management agencies.

  2. I enrolled in Care One about six months ago not really knowing what to expect, but I was a month behind onall of my bills and needed to do something.

    Care One did get better rates for me — I never had to talk directly to my creditors. I got a 22% APR dropped to 15% and a 19% dropped to 12%, and over $200 in late fees waived.

    They do charge a monthly fee which I sucks because that could be going to my debt, but they did help me get out of scary time.

  3. We used CareOne for our debt management program. We chose to enroll in this program because our credit card companies unfairly increased our interest rates even though we paid on time every month and refused to lower them when we asked.
    Our credit was pretty good, around 700-730 but we were in a never ending circle or debt, with high interest rates we never saw an end in sight. We’ve been making payment now for about 3 months (it takes awhile for your creditors to accept a negotiated rate/payment from CareOne) and now we feel so much more comfortable. We now have thousands of dollars in savings, lots of money in our checking, and most importantly we are finally putting a dent in our debt because it dropped our interest rates so much- some to 2%.
    There are some downsides though that you have to weigh, our credit scores did drop down to 630-680′s and some creditors list our payments as “late” for some reason. But CareOne said that the late status should change after about 3 months of consistent payments. Some creditors also list that your payments are being made by debt management program which I can assume does not look very good on your credit report.
    I believe a debt management program is good if you have a lot of debt with high interest rates that you never seem to be able to pay off. Just remember depending on the amount of debt you have, you really can’t take on new credit, sometimes for years.

  4. I entered a DMP (Money Management Intl) 4 years ago with a pile of debt and am now a month away from being debt free. I will say the service wasn’t exactly what I expected going into it – the DMP was very hands off and didn’t provide much in the way of real conselling. They don’t even explain the process very well, so it’s worth doing a little research on your own. That said, I’m not sure I could have tackled my debt without the reduced interest rates and the one-payment structure.

  5. With the current hammering to banks balance sheets, many of the major card issuers are offering 6, 12 & even 5 year hardship plans. These plans are offered direct to consumers without the need to seek outside assistance. The plans are often better than any CCCS company will be able to secure on your behalf.
    Some banks offer anywhere from 0 to 8% for the life of the balance. They will close the account, just like they do when you enroll in a debt management plan.

  6. Credit card debt is like having nightmares. A successful credit card debt settlement is getting a new lease of life.
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  7. Hi David,
    We are really happy to hear that you found the help you need with your debt via CareOne Debt Relief Services and we appreciate your post explaining the services we offer. We have some exciting changes coming up on our site. We are stepping up our game with the information and resources we provide to people to help them not only get out of debt, but to also STAY debt-free. We hope that you will come and check us out at http://www.CareOneCredit.com and let us know what you think!

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