Companies that offer debt management plans work with you and your creditors to develop a strategy to repay unsecured debts, like credit cards, medical debts, and other consumer debts. Often, companies offering debt management plans call themselves "credit counseling agencies."
While legitimate debt management plans might help certain people solve their financial difficulties, some of these programs can lead to more money troubles. Often, for-profit 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, you should be wary before signing up for this arrangement.
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 pay 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.
The most significant upside to a legitimate debt management plan is that creditors typically 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 good debt management plan. Eliminating the interest can significantly reduce the amount you owe each month.
Here are a few more advantages of using a legitimate debt management program:
If most of your debt is unsecured, such as credit card debt, and you're struggling to make multiple, large monthly payments, you might benefit from a debt management plan. Under a debt management program, you must make a single, lower monthly payment.
But you must have enough income to make payments. Debt management plans generally work best if you have less-severe financial difficulties. Otherwise, bankruptcy or debt settlement (modifying your repayment terms without a debt management plan) might be a better option. People sometimes attempt a debt management plan but end up filing for bankruptcy anyway because they can't keep up with the payments.
Also, a debt management plan might help if you're getting many debt collection calls. You won't receive calls from collectors on debts included in the plan. However, federal law allows you to stop collection calls even if you're not in a debt management plan.
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 to your creditors.
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:
Even if you're considering a debt management plan offered by a legitimate credit counseling company, you should still use caution before signing up for the service. Generally, debt management companies get paid either:
When you pay an agency to help you with your debt issues, you're spending money that you could use 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 your other debt-relief options (including bankruptcy) and determine if the amount you have to pay to participate in the plan makes sense.
In addition, debt management plans only address unsecured debts (like personal loans and credit card debt), and your creditors must agree to participate. Credits aren't required to accept less than they're owed and are under no legal obligation to accept the plan.
You also probably won't be able to get new credit while you're in a debt management plan. Most prospective lenders will require your debt management plan administrator to provide an approval letter.
Debt relief services, like credit repair, debt consolidation, debt settlement, and debt management plans, are advertised on the internet, radio, and television. But, in many cases, companies that offer these kinds of services are scammers who provide little or no help after you've paid them.
Even if a for-profit debt relief company does try to help you, you'll probably have to pay a lot for services you could do yourself or would be better off paying an attorney or legitimate credit counseling company. (Legitimate credit counseling agencies offer financial help for free or at a minimal charge.)
Fortunately, federal laws, like the Federal Trade Commission Telemarketing Sales Rule and some state laws, provide protection from scammer debt relief companies.
The FTC Telemarketing Sales Rule offers some limited protection against abusive for-profit debt relief companies. Among other things, the Rule:
The Rule only applies to for-profit companies, services related to unsecured debts, and services rendered after the debt relief company calls you or you call in response to an advertisement—not if the company communicates with you through the internet or the mail. The Rule also usually applies when the customer initiates a call in response to the company's advertisement through the mail or an email.
Almost all states regulate debt relief companies, and some states prohibit debt settlement companies from doing business. These state laws usually don't apply to lawyers and nonprofits, though. State laws that regulate debt relief services often:
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 nonprofit credit counseling agency:
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 ensure they're getting paid on time.
Attorneys provide many kinds of services to help people deal with their debts. Some of the most common debt-related services that attorneys provide are representing debtors in bankruptcy proceedings, debt management assistance, 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. Talk to a debt settlement attorney to learn more about settling your debts. Debt settlement attorneys also sometimes provide other services to debtors, including defending against a collection lawsuit or disputing incorrect information on your credit report.
Many bankruptcy and debt settlement attorneys offer free consultations and will quote you a fee after evaluating your circumstances.