Are Debt Management Plans A Good Idea?

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Are Debt Management Plans a Good Idea?

Debt Management Plans, as the term suggests, are meant to  “manage” your debts. Firms offering these programs work with you and your lenders to develop a plan to pay back your unsecured debts such as collection debts, small medical debts, credit cards and the like. In most cases, these firms are called credit counseling agencies. 

Essentially, debt management plans might help solve the financial woes and money troubles of some people. However, if you don’t do your due diligence, you just might end up opening a can of worms. Many of these debt management firms impose skyrocketing fees for services that borrowers can pretty much handle themselves. Some of them make promises they don’t keep and worse, they neglect to promptly pay lenders or not at all! 

These kinds of situations might make you think twice if a debt management plan is actually a good idea. Before jumping the gun on a debt management plan, it’s best to know first how it works. 

Here’s how… 

You deposit funds into a bank account on a regular basis, say monthly, and the credit counseling firm will use those funds to pay your lenders under the plan. Normally, you have to stick to a regular scheduled payment into that said account within three to five years. Most plans need you to pay the credit counseling agency a fee on top of the monthly deposits.

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So, how does this benefit you?

In all likelihood, the biggest advantage to a debt management plan is that your lenders more often waive some charges and bring down the interest rates of the plan. Nearly all creditors make some of these concessions when you’re on a lawful and authorized debt management plan. Think about it… reducing, if not, stamping out our interest can remarkably lessen the monthly amount that you owe. 

There are more upsides to using counseling services for debt management plans.

 Another one is you will receive “counseling” — financial counseling, credit counseling, details about several choices for getting out of debt and even budgeting advice. One more upside of using a debt management plan is your counselor talks straight with your creditors, so you don’t have to and that saves you a ton of headaches. 

Another benefit of a debt management plan is, it’s so much simpler for some people to consolidate a single payment per month to a debt management company instead of tediously making payments on various loans. Finally, once you complete a debt management program, your credit report will have a clean slate and all negative items on your report will only be reported for just seven years as opposed to ten years for a bankruptcy. 

Okay, now let’s examine the downside of having a debt management plan. First and foremost, it’s the sad fact that most of us can easily fall prey into a scam. That’s what we should be wary about. You certainly don’t want to end up signing your name on the dotted line for a debt management plan, and then signing up for services you don’t need and eventually paying money to a corrupt company that you could have just given directly to your creditors. 

You can find several debt management firms or credit counseling agencies are legitimate non-profit companies. But many are not. Check out the following scams and abuses brought about by illegitimate debt management companies:
  • As mentioned earlier, some debt management agencies do not promptly pay the creditors under the terms of the plan.
  • Worse, some of them do not pay the creditors at all and keep the deposits you make for themselves.
  • These counseling agencies assure you that they have the capability to persuade your creditors to give you reduced interest rates and lesser fees, but in reality, the agency cannot or will not keep their promise.
  • They charge you ridiculously high fees
  • They overrate the amount of money you’ll “save” with the debt management plan that they offer
  • Some companies lie about their nonprofit status, use this status to bait you, then they channel preposterously high fees to a for-profit company.
  • After which, these scammers will promise to provide financial advice or educational services, and then just automatically register you in a debt management plan without any provision of any kind of counseling about your options, then eventually file for bankruptcy.

Another significant disadvantage of debt management plans is that it tends to be pricey. 

Should you consider a debt management plan offered by a lawful credit counseling company, you should never let your guard down and throw caution to the wind? 

Think hard, before signing up!  

Here are some ways you can protect yourself from debt management plan scammers:

  • The counselors working for the firm must be certified by an independent agency. That means they should have passed a certification exam that tests for understanding in credit and consumer law, debt management, bankruptcy, as well as counseling and budgeting.
  • You must double-check with the Council on Accreditation (COA) or the International Organization Standardization (ISO) has accredited the company
  • Find time to get a background investigation if there are any complaints filed against the agency with your state attorney general’s office and local consumer protection agencies.
  • Make sure you put everything in writing, include all the fees, and follow up with your lenders to make sure that they are getting paid.
  • Hire a lawyer to find out more about settling your debts.

After much consideration, if you still lean towards signing up for a debt management plan, there are ways you can make sure that you are dealing with a legitimate nonprofit credit counseling firm. 

So, do your due diligence. 

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