Debt management programs can be an effective way to reduce your debts, particularly if most of your debt is unsecured credit card debt. But debt management plans have their limits: participation by your creditors is voluntary, principal balances are only selectively reduced, the repayment plan may continue for years and still leave you with significant debt, your participation may be noted on your credit report and some agencies pay their employees on commission or receive other compensation from your creditors when you enroll in their program.
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Participation by your creditors is voluntary. A debt management agency will approach your creditors with a proposed repayment plan. Negotiating the plan may take several weeks or months. While negotiating the repayment plan, you must continue to make payments to your creditors and interest will continue to accrue on your loans. At the end of the negotiation process, certain creditors may choose not to participate. If most of your obligations relate to unsecured consumer debts such as credit cards, store charge cards or unsecured personal loans, then your creditors are likely to accept a repayment plan. But what about the ones that won't? Harassment by debt collectors, wage garnishment and litigation will continue with any creditor that does not accept the plan. Your secured creditors may also be reluctant to accept a payment plan if they think the value of their collateral is at risk, so they may chose to bring a foreclosure action instead. Many debt management plans limit their programs to consumer debts only, so they do not help with back taxes or missed child support or maintenance payments.
Principal balances are only selectively reduced. Participating creditors will usually agree to significant reductions in your interest payments going forward but are more reluctant to offer commensurate reductions in your principal balances. In many cases, they will only agree to principal reduction in an amount that approximates the interest and penalty arrears that have been added to your account balances. Essentially, they are only agreeing to write-off delinquent interest and late payment fees that have been added to your principal.
The repayment plan may continue for years and you may still have significant debt. How much of your payment is being applied to reduce principal? Is there a realistic "finish line" at which time you will be debt free? Does your payment plan leave you enough free cash flow to live without getting into debt again? If your creditors do not significantly reduce your principal balances, than you may find yourself "treading water" for years instead of making progress toward financial recovery.
Your participation in a debt management program may also be noted on your credit report. Your enrollment in a debt management program may make getting new credit more difficult until your program is completed, which could take years. The debt management agency will require that all payments under the plan be made through them. But did you know that if they are late making any payments to your creditors it may appear as a late payment on your credit report?
The FTC is investigating some debt management agencies. The Federal Trade Commission and the attorney general for many states have recently sued several debt management agencies alleging that they deceived customers about the costs and benefits of the services offered. Some agencies have even misrepresented their status as nonprofit companies. Insist on written agreement with your debt management agency detailing all of their obligations to you, including an itemized written description of all of their fees and charges. Did you know that the employees of some of these agencies are paid on commission and benefit personally when you sign up for certain services, pay a fee or make a contribution to the agency? You should ask if any employees of are paid on commission. Many credit counseling organizations also receive additional compensation from your creditors when you enroll in a payment plan. Are they really working for you if your creditors are paying them too?
If a debt management program is not right for you or you are having trouble keeping up with your payments, you should find a bankruptcy lawyer to discuss the alternatives.
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