Overview of Debt Management Programs
A debt management program enlists the help of a third party management company. You will work with a debt consolidation company or credit counseling agency to consolidate your unsecured debts into one monthly payment. Essentially you will make one monthly payment to your debt consolidation company or credit counseling agency. They will disperse payments to creditors on your behalf. You do not need a good credit score to qualify for a debt management program.
This program does not erase your debt; it simply moves it into a program. You are still required to pay off your debt. You may be given lower monthly payments and time and distance from your creditors, however, the extended timeline often means you will end up paying more due to interest and fees. Although your debt management company has halted creditor harassment, creditors do not have to comply with your proposed program or negotiations and they can continue to perform collection actions.
How it Works
Every debt consolidation company handles debt management programs differently, but in general you can expect to experience the following steps:
#1: No-Obligation Free Debt Counseling
This step is a counseling session with a consultant from a debt consolidation company. You will analyze your financial situation and complete an income vs. expenditure review. During this assessment you must ask the following questions:
- Is debt consolidation right for me?
- Will it solve my financial problems?
- How much will I have to pay in fees?
- What is the tenure of the program?
These points are often glossed over or ignored because they highlight the reality of the debt management program. Debt consolidation may not be right for you, this program may not solve your problems, the fees may be unmanageable and you may end up paying off your debt for years to come. You will not know unless you ask because debt consolidation companies don’t regularly address these issues. If the consultant cannot give you adequate answers, be hesitant about moving on.
#2: Enroll Into Debt Management Program
During this phase the consultant will send you documents to sign. You are responsible for understanding and interpreting the complex contract to know exactly what the debt management program will and won’t do for you. These documents also detail the debt consolidation company fees you will pay throughout the program. If you choose to sign the contract you are giving the consultant power of attorney. This means the debt management consultant may talk to your creditors on your behalf and your creditors should no longer contact you about your debt.
The debt consolidation company is able to stop creditors harassing you, but they have no power to prevent creditors from pursuing legal action or collection activities against you. This means your creditors can still file a lawsuit, garnish your wages, levy your bank accounts and more in an attempt to collect debts from you.
#3: Consultant Begins to Handle Creditors on Your Behalf
This step is fairly self-explanatory. Your debt management consultant will contact your creditors and inform them you have enrolled in a debt management program. Any and all calls regarding your debt should be directed to your debt management consultant.
#4: Consultant Negotiates with Creditors
Now your consultant will begin negotiating with creditors to try to get them to agree to a repayment plan. Your consultant will request the following from your creditors:
- Reduced interest rates
- Reduced monthly payments
- Freeze, reduce or erase extra charges and late fees (in existence and future dues)
Compliance or agreement is voluntary for creditors. There must be value or benefits for creditors to agree to any of the above and your overall repayment plan. Your creditor may also request a review of your financial situation to ensure they are getting the maximum payment possible. This often means an extended repayment period so you have time to pay your debt in full.
#5: You Send Monthly Payments to Debt Management Company
In a debt management program you will make monthly payments to the debt consolidation company. This amount will be set by your consultant based on your debt, added fees and timeline. Your consultant will disperse the funds to your creditors (assuming they have accepted your repayment plan) according to the repayment plan, often keeping some as payment (if your fee is a percentage).
#6: Creditors Receive Your Payments from Debt Management Company
After your payment is given to your creditors you will receive a creditor statement confirming receipt of payment.
The creditor has all of the power throughout this process. You are handing your debt and monthly payments over to a debt management company, trusting they will perform based on your best interests.
Often the amount you pay in third-party fees plus creditor late fees, penalties and interest rates add up to be more than the amount you are trying to save by enrolling in this type of program. Fraudulent businesses and scams litter the consolidation industry making it difficult to find and trust reputable agencies and companies. Consider Chapter 13 as a debt solution; talk to a bankruptcy attorney today to discuss your options.
