Using Debt Management and Credit Counseling
Written by Fiona Gu   


A debt management plan may help you to obtain a lower interest rate, waive late fees, create a payment schedule that is acceptable to you and your creditor, and consolidate your monthly payments into one. However, you need to be cautious of the company you sign up with. There are many unreliable and fraudulent programs out there. Always keep in mind that the real purpose of you getting a debt management plan is to eliminate your debt and avoid bankruptcy.

You should read these facts before you continue the article:
  • Your credit score could be damaged when you use a reputable consumer credit counseling agency. This is because the credit counseling agency pays off your creditors on your behalf and helps you to survive.
  • The success rate of a debt management plan is 20%.
If you are highly concerned with any of the points given above, then debt management plan may not be the right option for you.

Before choosing a credit counselor, you should ask yourself the following questions:
  • What services are offered?
  • Would the agency help me to create a plan for avoiding future problems?
  • What are the associated fees?
  • What happens if I cannot pay the fees?
  • What qualifications do the agency’s counselors have? Are they accredited or certified by an outside organization? What training do they get?
  • What does the agency do to keep my personal information safe and confidential?
  • How does the agency pay their employees? Does their salary increase if I sign up for specific services, pay a fee, or make a donation?
Below is a step to step guide on how to choose a debt management program that’s suitable for you:

Step 1: Do it yourself. You can do many of the things that debt management agencies do on your own. These include making a budget, reducing unnecessary expenses, prioritizing your debts, and calling your creditors to waive late fees, lower interest rates, and/or work on a payment schedule with you. There is a slight possibility that your creditor would “re-age” your account, meaning your creditor would report your past-due account as current, however this is not guaranteed (regardless whether it’s you or your debt management agency on the other side of the phone). Often, your creditor would be happy to work with you if you are sincere about paying back the debt.

Warning: Signing up with a credit counseling agency will damage your credit score.

Step 2: Find a great credit counselor. Debt management programs and credit counseling are two different entities. You should first receive credit counseling before enrolling in debt management programs. Your credit counselor should not push you into a debt management program, but rather he or she should help you create a budget and explore other options, such as self-help methods or consolidation loans.

Tip: Research the prospective agencies in advance before deciding to enroll in their debt management programs. You should search for agencies on Better Business Bureau for the companies’ track records and reputations.

Step 3: Look for a licensed, accredited, non-profit agency. It is extremely important for you to make sure that the prospective agency is currently licensed in your state (unless your state does not require licensing), have an up to date accreditation, and non-profit status. These traits are to help you find a good agency, however you must research the agency in advance because there are no guarantees.

Note: Non-profit agencies do not mean they are free of charge. They can still charge you for their services, and give the profits to the corporate officers (at the end of the fiscal year) to zero their profit. 

Step 4: Know how the program exactly works. You may see “debt management,” “debt consolidation,” and “debt negotiation” used interchangeably, however they do refer to different options. Therefore, you should disregard the name of the program and find out how it exactly works by thoroughly reading any informational package or talking to an agent.

Step 5: Verify that the agency requires complete information from your current statements before giving you a quote. You debt counselor would require you to give all your credit card and loan statements before they tell you the monthly payment amount or the duration of the program. All agencies should require the following information from you:
  • Account statuses,
  • Creditor names,
  • Balance transfer, cash advance and big spending activities,
  • Minimum payment amounts, and
  • Interest rates.
Be cautious of any agency that does not require any of the information listed above.

Step 6: Avoid unreasonable upfront fees. Normal upfront fees are up to $50 or $100 (if you have a large debt or high income). Anything above this range would be unreasonable. If an agency requires you to pay a fee or make a donation, you should know what it would cover and have it in writing. You should definitely find out if you have to pay any extra fees to start the program. DO NOT pay one “consultation fee,” and then an “application fee” or an “enrollment fee.” If you really do not have any money to pay for the fees, you should find an agency that waives these fees or spread it out (free of charge).

Step 7: Avoid high monthly fees. Most debt management plans would charge a monthly fee in order to cover the administrative costs. Normally, the price should be $2 to $5 per creditor, or at most $50 per month. You should verify that your agency doesn’t charge any other maintenance fees, such as an annual fee, on top of monthly fees.

Step 8: Know how payments would be distributed to your creditors. Debt management companies are famous for making late payments and getting you (a client) into trouble with your creditor. Therefore, it is extremely crucial that you make sure your agency sends in your payments on time and during the right billing cycle. You should ask how soon your agency would distribute your payment after they receive it, and how you can track the payments. Your agency should send you a monthly statement or you can look up the record online.

Step 9: Know how your personal information would be protected. When you sign up for a debt management program, you need to provide some personal financial information. Make sure that your agency would not sell or disclose your personal information to another party other than the agreed creditors. Your agency must give you a privacy policy in writing and acknowledge you of the safeguards in place to protect your privacy.

Step 10: Accept a plan only if you can meet your requirements. Do not enroll in a plan that require monthly payment if you cannot pay for it. You could ask the agency for a lower price, contact your creditor yourself, or look at other debt management agencies.

Note: Many debt management plans prevent you from obtaining extra debt or additional revolving credit debt, such as credit cards and store charge accounts.

**Understand the terms and conditions, and make sure you can meet the requirements before you sign up with any agency!!

Step 11: Have everything in writing: You should get a contract before you enroll in a plan. Have all verbal promises in writing, and read carefully the contract to make sure the terms are acceptable. Look out for hidden fees. Do not sign up with a company that won’t give you a contract before your first monthly payment.

Step 12: Cut up every credit card you have so you would not go into any additional debt. This would keep you from going bankrupt!! For more information on cancelling credit cards, check out our section on doing so.

General Tips:
  • In rare situations, your creditor may ask you to pay the debt management or credit counseling agency before they accept the proposed plan. If an agency tells you this, you need to confirm it with your creditor in advance, and verify that the payment will be delivered to your creditor.
  • All credit counseling agencies must be approved and monitored by the Justice Department.
Warnings:
  • Do not stop making payments to your creditor until they have accepted the debt management program, and you have verified that the debt management program would pay your creditor. You would incur further costs if you miss any additional payments, and your creditor could resign from the agreement.
  • Research, research, and research thoroughly about your options in advance. Fraudulent companies would cost you a large amount of money and harsh consequences. You are already in debt; do not make the situation worse for yourself.
  • This article cannot replace professional financial or legal advice. It is just a general guideline. Choose the option that is the most suitable for your own financial situation.



 
Last Updated on Friday, 24 December 2010 07:02