If you’re interested in getting out of debt, you may have heard of debt management as one of several options. This involves lowering the interest rate on a credit card, which reduces your monthly payments to make them more manageable.
But no single debt relief option is right for everyone. So 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.
What is debt management?
Debt management companies, also known as consumer credit counseling agencies, work with consumers to secure lower interest rates through 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 process, the debt management company will enroll you in a debt management plan (DMP). Under terms of the DMP, the agency collects a monthly fee from consumers in addition to revenue from the credit card companies, called “fair share” payments (as determined by agencies’ agreements with credit card issuers).
What to look for in a debt management company
Credit counseling companies offer debt management programs. Here’s what to look for as you choose a debt management program provider:
- Straightforward information. The DMP should include materials that clearly explain how the process works, what to 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) tells you that they adhere to industry standards and best practices.
Red flags for 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. But, 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; it shouldn’t cost extra.
- 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 before explaining what they offer, beware.
Make sure that a company offering DMPs 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
- State Attorney General and your local consumer protection agency
- United States Trustee Program (part of the U.S. Department of Justice)
Questions to ask a debt management company
Ask the debt management company the following questions before signing on with any debt management provider.
|What to ask the company||Look for these answers||Why it’s important|
|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.|
|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.|
|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.|
|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.|
|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.|
|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.|
|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.|
|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.|
|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 “immediate credit score improvement.”||The old saying, “If it seems too good to be true, it probably is,” applies. Any solution will take work.|
|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 away if you feel like you are being talked into something not in your best interest.|
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.
Is debt management right for you?
If you can commit to the program and pay the required amount each month, it could be a good option for you. However, because the payments in a debt management program can be significant, many people leave the program because they can’t make their payments. In any event, you’ll want to weigh the pros and cons of debt management.
Pros of debt management
- Lower payments. Debt management plans reduce the interest rates you pay.
- Minimal credit score impact. A DMP doesn’t necessarily have a negative impact on credit scores. Your score will most likely go down, though, if your plan requires you to close credit accounts, which reduces your total credit available.
- Financial education. Reputable debt management programs could help you learn better budgeting and financial management skills.
- 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
- Time commitment. It typically takes five years to pay off all debt in a debt management program.
- No reduction of principal balances owed. It can take significant payments to pay off the entire principal balance, plus interest, within that five-year period.
- High monthly payments. Monthly payments required in DMPs usually are only slightly lower than regular minimum payments.
- Compromised credit. Enrolling in a debt management plan could make it difficult to obtain higher credit lines, such as a home or auto loan.
- Extensive fees. The monthly fees add up over the course of the five-year program, often amounting to several thousand dollars.
- Potential conflict of interest. There can be a conflict of interest between the debt management company and the customer, since 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. But if you have a significant amount of debt and are struggling to make minimum payments, debt management may not be the best alternative.
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.
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. You can do this on your own, although successfully negotiating your debt with creditors takes skill and an understanding of how the industry works. Most consumers who go this route with a debt settlement company.
A company working on your behalf will negotiate directly with creditors on your behalf to significantly reduce the total amount owed. At the same time, you accumulate funds for the settlement (in an account you own) through a monthly deposit. Typically, you don’t pay any fees until the company negotiates a settlement on one of your debts and a payment is made towards the settlement. Once the newly settled amount is paid off, the creditor considers the debt paid in full.
Who debt settlement can help
Debt settlement is best-suited for people with serious debt 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
- Reduces total balance. Debt settlement businesses work on a consumer’s behalf to lower the principal balances they owe.
- One monthly payment. Debt settlement has one monthly deposit, which can be less than minimum payments on credit cards and usually much less than the monthly payment in a DMP.
- Better repayment terms than bankruptcy. Debt settlement programs usually provide better repayment terms than do Chapter 13 bankruptcy filings, without leaving a bankruptcy judgment on their record.
- No conflict of interest with creditors. The debt settlement company receives no payments from credit-card companies.
- Fees assessed only when debts are settled. Debt settlement companies can charge fees only after they have settled the debt and the client agrees to the settlement amount and a payment is made toward the settlement.
- 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
- 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.
- 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 and support them through the process.
- Fees and interest will accumulate. Creditors will continue to assess these charges while 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 the right option for your debt relief needs
Whether you choose debt management, debt settlement, or some other type of solution, you should get started as soon as you can. Freedom Debt Relief will help you fully understand your options for dealing with your debt, including our debt relief program. Our Certified Debt Consultants can help put you on the path to a better financial future by helping you choose the best option. Find out if you qualify right now.