While debt management plans might help some people solve their financial difficulties, these types of programs can sometimes lead to more money troubles. Many debt management agencies charge high fees for services that consumers can handle themselves, make promises they don’t keep, and fail to pay creditors promptly (if at all).
Because many scammer companies offer debt management plans, every consumer should be extremely wary before signing up for this type of arrangement.
What Is a Debt Management Plan?
Companies that offer debt management plans work with you and your creditors to develop a strategy to repay your unsecured debts, like credit cards, small medical debts, and collection debts. In many cases, companies offering debt management plans call themselves “credit counseling agencies.”
Here’s how a typical debt management plan might work: You deposit money into an account every month, and the credit counseling agency uses the money to make payments to your creditors under the plan. Usually, you have to make regularly scheduled payments into the account for three to five years. The terms of most plans require you to pay the debt management company a fee in addition to the monthly deposits.
Upsides to Debt Management Plans
Probably the biggest upside to a debt management plan is that creditors often agree to waive some fees and reduce interest rates as part of the program. Most creditors will make some concessions when you’re on a legitimate debt management plan. Eliminating the interest can significantly reduce the amount you owe each month.
Here are a few more advantages of using a good debt management program:
You’ll receive credit counseling, financial counseling, budgeting advice, and information about many options for getting out of debt.
A counselor works with your creditors, so you don’t have to.
It’s simpler for some people to make one consolidated payment each month to a debt management company instead of making payments to multiple creditors.
If you avoid bankruptcy by completing a debt management program, any negative items in your credit report will be reported for just seven years, instead of up to ten years for a bankruptcy.
Downsides to Debt Management Plans
Unfortunately, it's far too easy to fall into a debt management scam, sign up for services you really don't need, or end up paying money to a disreputable agency that could otherwise go directly your creditors.
Falling prey to a debt management scammer. Some debt management companies are legitimate nonprofit credit counseling agencies, but many aren’t. Common debt management scams and abuses by scammer credit counseling agencies include:
failing to pay creditors on time under the terms of the plan
not paying creditors at all and keeping the deposits you make
assuring you that they'll convince creditors to give you lower interest rates and reduced fees, but the company can't or won't keep this promise
charging high fees
exaggerating the amount of money you'll save with a debt management plan
lying about the company's nonprofit status and using this status to attract you, then funneling unreasonably high fees to a for-profit company, and
promising to provide financial advice and educational services, and then just automatically enrolling you in a debt management plan without providing any kind of counseling about other options, like filing for bankruptcy.
Debt management plans can be costly. Even if you're considering a debt management plan offered by a legitimate credit counseling company, you should still use extreme caution before signing up for the service. Generally, debt management companies get paid either:
from creditors, who may voluntarily rebate a small percentage of the funds being paid by the consumer under the plan or
by charging the consumer fees—often called "contributions" or "donations"—which can be high. (A legitimate credit counseling agency might waive its fees if your income is very low.)
When you pay an agency to help you with your debt issues, you’re spending money that could be used to pay off your debts. Keep in mind that debt management companies often charge fees for services you might be able to do on your own, like contacting your creditors and working out individual payment plans or settlements. You might even be able to persuade your creditors to reduce fees, interest rates, and the principal amount that's due. You can then use the money you would have paid to the agency to pay down your debts faster or build up an emergency fund.
Before signing up for a debt management plan, you should explore all of your other debt-relief options and figure out if the amount you have to pay to participate in the plan makes sense.
Protecting Yourself From Debt Management Scams
If after you look into other forms of debt relief and consider the downsides of a debt management plan, you’re still thinking about signing up for one, make sure you’re dealing with a legitimate nonprofit credit counseling agency.
Here are some tips for finding a reputable agency:
Make sure the company is accredited, usually by the Council on Accreditation (COA) or the International Organization for Standardization (ISO).
The counselors working for the agency should be certified by an independent agency, which means they’ve passed a certification exam that tests for understanding in areas such as counseling, budgeting, credit and consumer law, debt management, and bankruptcy.
Check for complaints filed against the company with your state attorney general’s office, the Better Business Bureau, and local consumer protection agencies.
If you decide to proceed with a debt management plan, be sure to get everything in writing, including fees, and follow up with your creditors to make sure they’re getting paid on time.
Hiring an Attorney
Attorneys provide many kinds of services to help people deal with their debts. Two of the most common debt-related services that attorneys provide are representing debtors inbankruptcyproceedings and negotiating with creditors to settle debts. (Be aware that if you settle a debt for less than you owe, you might face a tax liability. The IRS generally considers canceled debt of $600 or more as taxable, unless you qualify for an exception or exclusion.)
If you want to learn more about filing for bankruptcy, talk to a bankruptcy lawyer. To find out more about settling your debts, talk to a debt settlement attorney. Debt settlement attorneys also sometimes provide other types of services to debtors including defending against a collection lawsuit or disputing incorrect information on your credit report. Many bankruptcy attorneys and debt settlement attorneys offer free consultations and will quote you a fee after evaluating your circumstances.