Debt Management: What you need to know

If you’re interested in learning how to get out of debt, you may have heard of debt management. Since no single debt relief option is right for everyone, before you make any decisions, you owe it to yourself to understand the pros and cons of a debt management program versus your other choices so you can get out of debt as fast—and as affordably—as possible.

For some people, debt management can be a good choice.

What is debt management?

In a nutshell, debt management involves lowering the interest rate on a credit card, which reduces your monthly payments to make them more manageable. Here’s how it works:

Debt management companies, also known as consumer credit counseling agencies, work with consumers to secure interest rates that are lower than the ones that consumers receive on their own. Debt management firms can secure these lower rates because they maintain pre-arranged agreements with credit card companies. Through these agreements, creditors can lower rates on a customer’s existing debt to what’s called a “concession rate.”

As part of the debt management process, credit counseling agencies often enroll consumers in a debt management plan (DMP). Under terms of the debt management plan, the agencies collect a monthly fee from consumers. Agencies also earn revenue from the credit card companies, called “fair share” payments. (Agencies’ agreements with credit card issuers determine these payments.)

What to look for in a debt management company

Credit counseling companies are the businesses that offer debt management programs. If you’re looking into debt management, it’s important to know how these companies operate. Here’s what to look for as you choose a debt management program:

If you’re looking into debt management, it’s important to know how these companies operate

  • Straightforward information: The debt management program should include materials that clearly explain how the process works, what you should expect, and what your fees will be.
  • Trained counselors: Debt management counselors should be certified and trained in debt management, consumer credit, and budgeting.
  • Educational materials: You should get educational materials (at no additional cost) as part of your program, so you can carry forward what you learn.
  • Budgeting support: A debt management program should include advice on how to manage your debts and your overall budget.
  • Membership in industry organizations: Membership in the National Foundation for Credit Counseling (NFCC) or Financial Counseling Association of America (FCAA, formerly the AICCCA) tells you that the debt management company adheres to industry standards and best practices.

Red flags about debt management

Many people assume all credit counseling agencies are nonprofit organizations, and therefore provide services for free and operate on the up-and-up. This is not always the case. While there are many reputable debt management companies that charge fees, not all are worthy of your business. Before signing anything, read the fine print and be sure you understand what you’re signing up for.
Here are some red flags to watch for:

  • Hidden fees: If the company won’t give you a clear picture of what you’re paying for or the value you are getting, consider that a red flag.
  • “Voluntary” contributions: No debt management company should ask you to help them out.
  • Advice for sale: A company’s plan should include any promised educational materials or workshops. Watch out for companies that charge extra for educational information.
  • Requiring personal details up front: A reputable company will tell you about its services without forcing you to commit. If a company requires specific details about your situation—such as the names and addresses of your creditors, your Social Security number, or your family’s contact information—before explaining what they offer, beware.

Due diligence

You’ll want to make sure that a company offering debt management programs is legitimate before you agree to put your financial future in their hands.

Before you sign up with a debt management company, check its credentials with these organizations:

  • Better Business Bureau: Check the BBB page of the agency offering the debt management plan. Read through any complaints, and most important, review how the company deals with complaints. Their approach can give you insight into the company’s customer service and how much it values its customers.
  • State Attorney General and your local consumer protection agency: Search these organizations’ sites to verify they are registered as a debt management company and find out if the companies you’re considering have had complaints filed about them by local consumers.
  • The United States Trustee Program: Part of the U.S. Department of Justice, the Trustee Program provides a list of credit counseling agencies that are approved to provide counseling before a bankruptcy filing.

Questions to ask a debt management company

It can be hard to know what to ask a debt management company, especially if you don’t know what you don’t know. We’ve got you covered. Ask questions about these areas before signing on with any debt management provider.

  1. Compensation
    How does the debt management company make money? Assure yourself that there is no conflict of interest between your best interests and those of the creditors they work with.
  2. Employees
    What is the training and background of the employees? How are the company’s employees paid? Do they earn more if you buy services that they promote? The Federal Trade Commission recommends you steer clear of debt management companies that pay employees a commission.
  3. Range of services and individualization
    Does the company provide consultations and advice to consumers free of charge? Or does the company push every consumer into a pre-determined plan, such as a DMP or debt settlement plan? Be especially wary of any company that tries to drive you straight into a plan without thoroughly reviewing your finances, discussing the pros and cons of their program, and/or talking about other potential solutions to your debt problem.
  4. Free education
    Does the debt management program include educational material, such as budgeting and financial advice, free of charge? Many firms consider educational material an additional fee source, not a benefit to their clients.
  5. Background
    What is the background of the management team? Look for good, relevant education and experience—not a team that jumps from opportunity to opportunity to make its fortunes.
  6. History
    How long has the company been in business? How many customers have its debt management programs served? Determine if the company and its employees provide service through the life of the program, or if they contract out to others once they have enrolled a client.
  7. Success
    What are the company’s dropout and success rates for its debt management programs? Request and review these statistics. They indicate how companies structure resolutions and payment plans for clients. The National Foundation for Credit Counseling (NFCC) has reported that credit counseling companies historically have a success rate of about 26 percent. That means only one-fourth of people who start a plan complete the whole plan.
  8. Fees
    What are the fees, and how will the debt relief provider assess them? Credit counseling companies assess a monthly fee for each debt enrolled in a DMP. While these fees vary, over the course of five years—the typical length of a DMP—the fees can add up.

Be especially wary of any company that tries to drive you straight into a plan without thoroughly reviewing your finances…

Above all, trust your instincts when evaluating a DMP. If a “gut feeling” says something isn’t right with a company, move on. Numerous organizations can help consumers resolve financial issues—with integrity and skill.

  Ask the company … Look for these answers … Why it’s important
1 Do you charge up-front fees? Credit counseling agencies typically charge an initial fee of $50-$75. State law may cap fees, but not all states have fee-cap laws in place.
2 What future fees will I pay? Credit counseling agencies typically charge a monthly amount per debt (account) enrolled in a debt management program. Fees can vary widely. It’s easy to underestimate how much you might pay in monthly fees. Avoid the “fee surprise” scam by requesting a schedule of fees in writing.
3 Do you have a BBB accreditation and rating? Positive score, preferably with multiple positive customer reviews as well. Having no BBB accreditation is not a red flag unless they avoid telling you why.
4 How many years has your company been in business? Longer is better. Companies that deliver good customer service and good results tend to stay in business longer. They are the opposite of a fly-by-night operation.
5 What industry associations do you belong to? When evaluating credit counseling agencies, look for NFCC or FCAA membership. Membership tells you that the firm adheres to industry standards and best practices. Having no memberships can be a red flag.
6 Where does your company receive its funding? Credit counseling agencies receive funding from consumers and credit card issuers. Open, honest credit counselors discuss their funding sources. Ask questions as needed to decide if the counselor is working for you or credit card issuers.
7 What educational tools do you provide clients? Review sample budgeting forms and other educational materials to understand what you will get from the process. Everyone learns differently. Choose a company that provides tools that you feel will best help you.
8 Are your services personalized? Look for online or other services set up for your individual needs. One size does not fit all in debt management. A provider that strives for personal service offers more value and probably has a higher client success rate.
9 Can you back up your claims? Unreliable providers promise impressive results no one else can provide. Beware of quick-fix promises or claims like “No credit score harm” or “credit score improvement.” The old saying, “If it seems too good to be true, it probably is,” applies. Any solution will take work.
10 Can I take some time to think about your company and program, and get back to you? Reliable companies will be here for you tomorrow or next week, when you’re ready. Companies that demand you make an instant decision may not be legitimate. You’ll have a better chance for success working with a company that respects your needs. Walk the other away if you feel like you are being talked into something not in your best interest.

Is debt management right for you?

Deciding if a debt management program is right for you takes careful consideration. If you can commit to the program and pay the required amount each month, it could be a good option for you.

Because the payments in a debt management program can be significant, many people leave the program because they can’t make their payments. Be aware that:

  • Sticking with debt management requires commitment and responsibility.
  • You may have to make lifestyle changes.
  • For a time, you’ll probably be unable to secure additional credit, including a home or car loan.
  • If you encounter challenges like medical issues, divorce or job loss during the debt management program, the challenge of making all payments and covering all expenses will be even greater.

In these cases, consumers may need to rely on another debt relief option, like debt settlement or bankruptcy, to get out of debt.

If you think debt management might be right for you, learn more by reviewing these pros and cons:

Pros of debt management

  1. Lower payments: Debt management plans reduce the interest rates you pay.
  2. Minimal credit score impact: A debt management plan doesn’t necessarily have a negative impact on credit scores. Your score will go down, though, if your plan requires you to close credit accounts because closing accounts reduces your total credit available.
  3. Financial education: Reputable debt management programs could help you learn better budgeting and financial management skills.
  4. No collections: While in a debt management program, consumers generally avoid harassment or collection calls as long as they continue paying their bills.

Cons of debt management

  1. Time commitment: It typically takes five years to pay off all debt in a debt management program.
  2. No reduction of principal balances owed: Debt management plans don’t reduce the total principal amounts you owe. It can take significant payments to pay off the entire principal balance, plus interest, within that five-year period.
  3. High monthly payments: Monthly payments required in debt management plans usually are only slightly lower than regular minimum payments. You’ll still need to be able to make those monthly payments. Many consumers attempt a debt management plan but eventually wind up filing bankruptcy because the payments are more than they can afford.
  4. Compromised credit: Enrolling in a debt management plan could make it difficult to obtain higher credit lines, such as a for a home or auto loan.
  5. Extensive fees: The monthly fees add up over the course of the five-year program, often amounting to several thousand dollars.
  6. Potential conflict of interest: There can be a conflict of interest between the debt management plan company and the customer. That’s because part of a credit counseling agency’s revenue comes from the creditor, based on the amount repaid.

Still, debt management could be a good debt relief option for consumers who would benefit from a lower interest rate and can stick with the program for five years.

If you have a significant amount of debt and are struggling to make minimum payments, debt management may not be the best alternative. You may need more help than just a reduced interest rate. Or, if you are in a period of your life where you’re facing some serious hardships and may have a difficult time paying more than you’re already paying each month now, debt management may not be the best fit. Other debt strategies, such as debt settlement—which is what Freedom Debt Relief offers—may suit you better. Give one of our Certified Debt Consultants a call at 800-230-1553 and they could help you figure out the right solution.

Debt management … or debt settlement?

Debt management is often confused with debt settlement. While debt management works to lower interest rates, debt settlement (also known as debt negotiation or debt resolution) involves reducing the total amount of debt owed. Reputable debt settlement programs may offer an alternative to credit counseling, debt consolidation and bankruptcy.

Is debt settlement a better option?

See how it compares to debt management plans

So what is debt settlement?

Debt settlement is a method of debt relief where experts negotiate with creditors on behalf of consumers to settle on a reduced amount that the consumer will repay. Freedom Debt Relief is a debt settlement company. In fact, we are the largest and most experienced debt settlement provider in the country, having helped hundreds of thousands of people significantly reduce their debt and get back in control of their finances. Freedom Debt Relief has saved more than $3.5 billion for consumers since the company was founded in 2002.

During the settlement process, we:

  • Negotiate directly with creditors on behalf of our clients
  • Aim to significantly reduce the total amount owed
  • Help our clients resolve their debt as quickly as possible

As we negotiate with clients’ creditors, each client accumulates funds for the settlement (in an account they own) through a monthly program deposit. No client pays any fees to us until we successfully negotiate a settlement on one of their debts and a payment is made towards the settlement.

Who debt settlement can help

Debt settlement is best-suited for people with serious debt—usually $7,500 or more—and who are struggling to make minimum payments. Usually, only unsecured debts are eligible for debt settlement. “Unsecured” means the debt isn’t tied to an asset, like a car or house. Most unsecured debt is credit card debt, although sometimes other debts, like medical bills, are eligible for debt settlement.

Pros of debt settlement
  1. Reduces total balance: Debt settlement businesses work on a consumer’s behalf to lower the principal balances they owe.
  2. One monthly payment: Debt settlement has one monthly deposit, which can be less than minimum payments on credit cards. This monthly deposit is usually much less than the monthly payment in a DMP.
  3. Better repayment terms than bankruptcy: Debt settlement programs usually provide better repayment terms than do Chapter 13 bankruptcy filings. They help people get out of debt without leaving a permanent bankruptcy judgment on their record.
  4. No conflict of interest with creditors: The debt settlement company receives no payments from credit-card companies.
  5. Fees assessed only when debts are settled: Rules enacted by the Federal Trade Commission in 2010 mandate that debt settlement companies can only charge fees after they have settled the debt for the client and the client agrees to the settlement amount and a payment is made toward the settlement.
  6. Trade association: The American Fair Credit Council enforces a strict code of conduct for its members. Members can join the AFCC only if they comply with the FTC regulations for the industry.
Cons of debt settlement
  1. Impact on credit scores: Debt settlement can hurt your credit because it involves letting accounts go delinquent. However, once settlements are negotiated and resolved, people typically see their credit scores rise. And once you are debt-free, you will be in a better position to rebuild your credit as quickly as possible.
  2. Collection agencies or creditors may still call: Some particularly aggressive creditors take legal action for unpaid accounts. A good debt settlement company will prepare its clients for this possibility and support them through the process.
  3. Fees and interest will accumulate: Creditors will continue to assess these charges during the time when the debt settlement company is negotiating with your creditors. However, these fees and charges are included in the negotiation, and will therefore be included in whatever settlement is reached.

Debt settlement requires strong commitment to learning how to budget and living within your means. But for many people, it can be the process that helps them eliminate their debt once and for all, learn better money habits, and get on the road to financial freedom.

Find your best option soon

Whether you choose debt management, debt settlement, or some other type of solution, all that really matters is that you get started as soon as you can toward getting rid of your debt. Every day it grows larger, and the pressure and stress gets bigger too. We are here for you if you need to talk. Give us a call at 800-230-1553 to talk to a Certified Debt Consultant about debt management, debt settlement, or anything else you need answers on.

If you’re just starting your research and want to learn about other options, download our How to Manage Debt Guide. It covers over a dozen debt solutions in detail, not just debt management and debt settlement. Whatever solution you choose, good luck!

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