Debt management counseling is payment program that helps people who are in debt to work with their creditors to make affordable monthly payments. People who benefit the most from debt management counseling typically have multiple creditors and over $10,000 in debt.
Debt management counseling is an alternative to filing for bankruptcy. People who use these programs still pay back their debts, but they may get a lower interest rate or have some fees waived. This can make getting out of debt more affordable and less stressful.
With a debt management company, you work with a credit counselor to come up with a debt management plan. This plan will determine how much you will pay each month to the debt counseling program. They will then distribute this money to all of your different creditors.
There are many things that are considered when making a debt management plan. These include income, household expenses, how much money is owed, and how long it will take to pay back a debt. By considering all of these things, the debt management counseling program is able to come up with a schedule that satisfies both the creditors and the debtors.
Who Benefits
Debt management counseling isn’t for everyone, but it is a good option for many people. Unsecured loans such as credit card bills and medical bills are covered in these programs. Student loans and payday loans are often covered as well. People who only have secured loans such as mortgages and car loans are not good candidates for debt management counseling.
People who have been unable to get a repayment plan with a creditor often turn to debt management counseling. Creditors who are unwilling to work with individuals may make a deal with a company. This is an option for people who wish to stop the creditor phone calls and would like to deal with only one organization instead of many.
What to Look For
While a well-run debt management counseling program can enable people to get out of debt, there are some shady organizations out there that take advantage of desperate people. This is why it is essential to know what to look for in a program.
The first thing that should be checked is if the organization is licensed or registered in your state. Many states require that an organization be licensed before it can offer debt management counseling, so any that aren’t registered should be avoided.
The best debt management counseling organizations will offer a wide variety of services beyond just a debt management program. While paying off current debts is the most pressing issue, counseling about budgets and savings can help a person stay on their debt management plan and avoid getting back into debt down the line. There is no one-size-fits-all debt management plan so a debt management counseling service should discuss all issues with you and make a personalized plan.
Programs should have debt counselors that are certified or accredited by an outside organization. If these counselors get paid a commission to sign up clients for certain services, their advice may be biased. It is also possible that creditors compensate the organization if clients sign up for a debt management plan. A company should disclose this fact.
Before starting a debt management plan, the client should get all of the details in writing. While receiving information and counseling over the phone is fine, don’t agree to anything without first reading over all of the documents and signing them.
Types of Fees
Whether a debt management counseling program is non-profit or for-profit, fees will be charged. The types of fees vary, so a person who is seeking counseling should get a detailed list of all the fees in writing before signing up for a program.
Many of these fees are setup fees that the customer pays when they first start a debt management plan. In addition to this, some organizations will charge a monthly fee. When working on a debt management plan, ask if the fees are included in the quote. Some companies may offer reduced fees or waive the fees for customers who cannot afford them.
Debt Management Counseling and Credit Ratings
Some people are hesitant to sign up for debt management counseling because they are afraid that it may hurt their credit rating. But if a person is making late payments and is in danger of becoming delinquent, they are hurting their credit ratings more than debt management counseling would.
While being in a debt management counseling program will make it difficult to obtain new credit, it shouldn’t hurt your current score. When FICO calculates a person’s credit score, it ignores information about credit counseling.
Other Considerations
When signing up for debt management counseling, it is essential that the monthly fees are paid on time every month. Find out what happens if a payment is late or missed. It is possible that the creditor will go back to the original repayment terms or charge late fees. Signing up for debt management plan with too high of a monthly payment that cannot be maintained may leave the creditor in a worse position than before.
