What Is A Debt Management Program And How Does It Work?
A debt management program is a way of managing and paying for personal unsecured debts with the aim of eventually eliminating these obligations. This debt solution is practiced in America, the UK, New Zealand and many other countries. A debt relief company reviews the debts, sizes up income and budget, negotiates a reduction in interest rates and payments with the lenders and accepts one single payment from the debtor and appropriates certain amounts to the different lenders. The reworked rates and payment schedule should be affordable to the debtor to increase the chances of collection by the lenders. However, not all lenders are willing to get involved in these programs.
Debt solution programmes are used to help consumers manage and get rid of personal unsecured debts, including credit cards, personal loans, student loans, store cards and bank overdrafts. Secured debts such as home mortgages, car loans, rent and utilities and other priority expenses are not covered here.
Pros And Cons of A Debt Management Plan
DMP Company Negotiates On Your Behalf A More Affordable Monthly Payment Schedule. By haggling to reduce interest rates and monthly payments, you can afford to pay your monthly dues. Your debt consultant can also ask creditors to waive late penalties and other charges.
One Single Payment. Instead of sending payments to each of your creditor, you can enrol your bank account to automatically send monthly a fixed amount to your debt counselor, who will be responsible for distributing the payments to each of your creditors.
Ends Harassing Calls From Collection Agencies. With your account under DMP, your creditors will suspend collection efforts. And besides, if your DMP counsellor effectively secures you an affordable payment schedule, you have no reason not to default, hence, the collectors have no reason to call.
Avoid Bankruptcy. Assuming the DMP company is doing a good job in managing your obligations, then the programme may help you on your way to recovery.
May Affect Your Credit Score. When you sign up for debt solutions services, some creditors may put on record a Default Notice with credit reference agencies. This could affectyour eligibility to obtain additional loans. However, if your record already reflects defaults, the impact on your credit score may not be significant.Debt management plans are not actually logged on your credit file, but your incapacity to fulfill the agreed payments will be written down. There are creditors who impose the payment of the minimum due by obtaining a County Court Judgment against you. This will reflect on your credit record.
Discontinued Use of Credit. Under this debt relief plan, the first tip you usually get is to stop using your credit cards so that you avoid adding more to your obligations. However. this absence of credit activity may negatively affect your credit score. You may not be able to obtain a secured loan while in this program. Unsecured credit may be difficult to obtain and usually leads to high interest rates.
Exorbitant Fees. Availing of these debt solutions is not free especially when you deal with a commercial company. Even a nonprofit association may require some money from you. Stay away from credit consultants who charge exorbitant fees.
DMP Vs Other Debt Management Services
Do not agree to go through a DMP just because your credit counselling agency tells you so. If you think that for some reason, it is not suited for you, ask for other options. Other advanced debt relief solutions include debt consolidation and debt settlement. In debt settlement, the debtor will offer the creditor a one time payment that is less than the total owed (usually 50%) to write off the entire obligation. If you have been paying your monthly minimum dues, your creditors may not agree to this. Review you financial situation and compare the different services so that you can assess which debt relief option best suits you. Do not confuse DMP with debt consolidation. In the latter, you consolidate your debts by taking a new loan with lower rates to pay off all your debtsand make one payment for this loan.
If you are an Armed Forces veteran in the USA, you can seek the service and advice from its VA Debt Management Center provided for by the Department of Veteran Affairs. The center also caters to members of the military, veterans and their family who have financial obligations to the American government. If you owe them, you may have already received a letter from this office.
Seeking Help From Debt Management Credit Counseling Agencies
An important service provided by many debt solutions providers is counselling. Some companies provide counselling online or over the phone as initial service. Before enlisting in any of the debt solutions, ask for tips and advice from your counsellor. Simply negotiating for a reduction of rates and monthly payments is not an assurance that you can settle your bill. You have to understand how you are put into this position. It could be your spending habits that may have caused you to pile up all these debts. Credit counsellors often have debt calculators or debt reduction planners and similar software or system that can help you determine how much you owe and how long it will take you to pay off your obligations. Your debt solution firm may have their own version of this calculator.
You may also check out money advice online, such as the website of Suze Orman. She is a credit counsellor from Arkansas. Her site provides valuable information, tips and systems which may help you in resolving your financial affairs.
Beware of Credit Card Debt Management Scams
When choosing a debt solutions provider to handle your debt woes, take extra care not to get involved with scam artists who disguise themselves as debt manager but are actually only there to bilk money from you. A group of fraudsters may classify their company as Christian or as a foundation or non profit as a marketing ploy to attract clients. For your security, make sure that you only deal with a reputable organization. To avoid these bad companies, always verify if a group is registered with the Better Business Bureau. If they are, check for any list of complaints that have been filed against them to give you an idea of how they deliver their work. Searching online can also lead you to pages that contain complaints against certain companies.
Also, verify if your debt relief company is an affiliate of yourcreditors. Many debt relief providers are associated with creditors. These companies may be inclined to prioritize the creditors’ benefit over yours.
Choosing From A Pool of Debt Management Companies
Debt managment is a booming business as you can see in the number of organizations involved in the industry. There are commercial and nonprofit companies. All you need to do is search online to find a long list of these companies. Examples are Genus Credit Management, Freedom Debt Management Inc., Global Debt Management LLC, Homeland Financial Services Corp, Freedom Debt Management, Trinity Debt Management. and Settlement Corporation of America. The mention of these companies does not imply my endorsement for them.
UK has their Citizens Advice Bureau, a charity that helps people fix legal, money and other problems through their free, autonomous and confidential advice. It is also known by its longer name National Association of Citizens Advice Bureaux. Another charity in the UK that can help consumers deal with debt problems is CCCS or Consumer Credit Card Service. Consumers in UK can also apply to court a Debt Administration Order. The court issues a directive for the debtor to make payment to the court based on how much the debtor can afford. The court allocates the payments to the creditors.