Best Debt Management Program: How To Find Good Debt Consolidation/Reduction Services

June 8th, 2009

It’s kind of an understatement to say that the debt consolidation/counseling industry receives its share of bad press. After all, there are countless horror stories about how people signed up with a debt management company and a few months or a few years down the line, they find themselves worse off than they were when they signed up, for a number of reasons. Yet, the fact remains that if those companies exist and keep getting business, it’s because there’s a need that they fill (or at least promise to).

Every industry has its bad apples, and the Enron’s, AIG’s, and Archway’s of this world should serve as a reminder of that. That being said, there’s no denying that if you want to give yourself a chance of getting the best out of a debt management program that you enroll in, you have to tread carefully to make sure that not only do you get the level of service that you’re paying for, but that you also benefit from the whole process. You should start off by knowing what to expect.

What is a debt management program?

You’ll find plenty of definitions online for debt management program. One of the simplest is

“A repayment plan brokered by a credit counseling agency, which receives a monthly fee for handling the payments.”

In other words, a debt management program (or debt management plan) is a service offered by a credit counseling agency or debt relief company when you’re in a difficult financial situation and you need more than basic budgeting to help you pay off your debt. The company negotiates on your behalf with your creditors in order to help you get lower rates on your debts. The result is that your monthly payments are lowered and you’re in a better position to pay your bills on time. In return, the company charges you a fee for its assistance in getting you back on track.

Reputable credit counseling organizations also employ counselors who are certified and trained in consumer credit, money and debt management, and budgeting. Nonprofit debt management companies have a legal obligation to provide education and counseling.

What debts are included?

Only unsecured debt can be included in a debt management program: hospital and medical bills, credit card bills, student loans, payday loans, and so on. However, payday loans and student loans may not be covered by certain plans. Unsecured debt means money that you owe that isn’t secured by your home or some other asset that belongs to you.

Also, creditors may agree to lower interest rates and waive or reduce certain fees and finance charges if you are repaying through a debt management plan. You’ll also receive fewer collection calls, as most creditors will stop their collection activities. It’s important to know what debts aren’t included in the debt management program because you’ll need to keep paying those debts on your own.

When do you need a debt management program?

Debt management programs aren’t for everyone. Depending on your personal financial situation, other solutions may be available to you. Even if you have severe debt, certain criteria have to be met for a debt management plan to be suitable for you:

Your situation is serious enough to warrant outside help, because you have multiple bills and are unable to manage them efficiently.
You’ve tried out self repayment plan but it has not helped you to overcome your debt problems.
You’re in financial crisis and wish to get rid of your debts.
You want to stop getting collection calls.
You want to lower the interest rate on your bills.

Look for the following warning signs that tell you that your debt situation is getting out of control:

You’re using credit cards to cover daily living expenses.
You’re making only minimum payments on credit cards; or struggling to make even minimum payments.
You’re carrying multiple credit cards and rotating their use to juggle balances and due dates.
You’re making payments late or missing payments for more than one month.
You’re charging more each month on your credit cards than you are paying toward the balance.
Your credit cards are at or close to their limit.
You don’t know how much you owe.
You’re getting calls from creditors.
You’re taking out loans or using equity in your home to pay off debt.
An interruption in income would cause immediate difficulty paying bills.

How do you benefit from a debt management program?

The benefits of a debt management plan are:

Your creditors lower your interest rates, thus your monthly payments are lower.
Late fees, over-the-limit fees, and various finance charges are waived off.
You get way less calls from creditors, since one you enroll in a debt management program, most of them will stop collection efforts.
You only have to deal with making one payment instead of several.

How do you find the best debt management program?

To find out the right debt management company, you need to check the following:

Company profile and service background. One thing all great debt management programs have are certified credit counselors through the NFCC (National Foundation for Credit Counseling). This ensures that any counselor you work with has gone through extensive training and has taken six certification tests to get accredited. Anyone who handles your money should be a professional.
Client testimonials and/or complaints. Do your research and try and find testimonials from previous customers (and we’re not talking about the obviously faked ones). Ideally, you want a company that will not only assist you in your current situation, but that will also give you the tools so that you don’t show up at their doorstep again. Once you’ve identified credit counseling organizations that suit your needs, check them out with your state Attorney General, local consumer protection agency, and Better Business Bureau. These organizations can tell you if consumers have filed complaints about them. The absence of complaints doesn’t guarantee legitimacy, but complaints from other consumers may alert you to problems.

What happens in a debt management program?

The debt management company will assess your financial situation and assist in creating a spending plan based on your current financial situation. It takes into account the interest rates on your bills, total debt amount and the required minimum payment.
Once you enroll for debt management services, the company negotiates terms such as lower interest rates and waived fees and charges, often providing you with more affordable payments and a shorter payoff period.
The company works out a repayment plan with your creditors such that you can pay back the outstanding balance as per your affordability.
The company consolidates all of your unsecured debts into one convenient monthly deposit. You make that payment to the company, and it then disburses the payment directly to your creditors. This goes on for 3-4 years till you have paid off your bills.

What are the tips to a successful debt management program?

There are 7 Tips to ensure your success in a debt management program.

Accept a plan only if you can afford it: If the debt management company cannot negotiate for a repayment plan you can afford, it’s better not to retain its services. Signing up for a debt management plan while you can’t afford the monthly payment is a recipe for disaster.
Get everything in writing: Do not avail the services of a company offering verbal agreement. Get the terms and conditions in writing. Verify the monthly fees and duration of the program before you sign the agreement.
Get the debt management plan approved by creditors: Before you sign on a debt management program, make sure it is approved by your creditors. For example, some creditors require a payment to the credit counselor before accepting you into a debt management plan.
Make regular payments: When you enroll for debt management services, try to pay at regular intervals. Don’t stop paying while you’re on the plan. This is kind of a no-brainer.
Make sure the fees aren’t high: There are many companies who charge separate application fee, enrollment and consultation fees. Find out what fees are charged by the company. Make sure you’re not paying higher fees.
Keep track of your payments: Make sure the company doesn’t send late payments to your creditors. Just keep track of how the payments are disbursed. The best debt management companies will provide you with monthly statements that allow you to track your progress.
Protect your personal information: Make it a point to get a written privacy policy from the company. When you go for a debt management plan, you have to provide some personal information as well. Make sure that your personal information is not revealed to others. Since identity theft has become so prevalent, you must be able to fully trust your debt management program to keep your information safe.

Does a debt management program affect your credit?

A debt management plan will not hurt your credit score as negatively as a debt settlement plan. Typically, when you enter a debt management plan it will be noted on your score that you are getting assistance in managing your credit card bills but so long as you stick with the program and pay your new consolidated payment on time every month, the mark on your credit report is not something to be too concerned about.

Put another way, in most cases, you are much better off getting assistance through a credit counseling agency (the firms that typically offer debt management programs) than you are in letting your problem get worse. Don’t let the mark on your credit score be a deterrent because if your financial situation gets much worse then you will likely need to seek more drastic solutions like debt settlement or bankruptcy both of which do much more damage to your credit score.

Getting help early is the most important step. Don’t let your debt spiral beyond your control. It’s a problem that only gets bigger if left alone.