Debt Management Plan Pros, and Con Games
February 15
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debt management plans by Pete Low

A Debt Management Plan can help, if you're in debt and need somebody to help you work out a repayment plan and make sure you stick to it. It's like joining a weight loss group--instead of just trying to eat less on your own, you get professional advice and somebody watching over you to give you that extra discipline.

But... (You could tell there was a "but" coming, couldn't you?)

Debt management plans attract a lot of scammers. If you're caught up in a debt management scam, I'll give some advice how to get out. If you're thinking about signing up for a dept management plan, I'll give you some warnings.

It's human nature to want a quick and painless solution to debt. Just like weight loss, come to think of it. You've probably seen the ads: "Take these pills and watch your bad debt melt away." "Drop 10K of unsightly debt in a week, with just 10 minutes a day." Um, wait... Well, something like that.

Debt Management Plans: A Good Idea in Theory

The idea behind debt management plans is good, if the company's honest. Here's how it works. You sign up with a credit counseling company that your lenders trust. The counselor talks to you, works out a budget, and then says to your lenders: "Look, we've put our client on a budget and she can afford to pay $X a month on her past-due bills. Will you settle for less and declare everything paid in full, if she pays that much every month for three years? We'll get the money from her and send it to you, we promise, cross our heart."

Because the lenders trust the credit counselor more than they trust you (sad but true), they agree. You get a better deal than you ever could otherwise.

So the credit counselor sets up a fund that you send money to each month. When the money arrives, the counselor pays it to your lenders according to a plan that everyone's agreed to.

Here's the problem. The credit counselor charges a fee to set up the fund and to administer it each month. So they're making money there--which might be okay, if it's a reasonable amount. After all, they're performing a service and helping you get a break from your lenders.

Problem is, what's reasonable? How many hidden fees and extra charges can they tack on? Non-profit credit counselors may only charge $25 or $30 a month and the same or less as a set-up fee in the beginning. For-profit counselors will charge as much as they think they can get away with.

The Hidden Kickback

But on top of your fee, here's something they may not tell you. Lenders secretly pay a kickback to credit counselors, about 15%, every time they receive a payment through a debt management plan.

debt management

You don't know about this, because you give $200, let's say, to the counselor and the counselor takes a cut of $25 and sends the remaining $175 to your lenders, and if you asked the lenders, they'd say they received $175 from you and credited it to your accounts, just as promised.

But the lenders give $26.25 back to the counselor. So the counselor makes money from both ends, $25 from you and $26.25 from the lenders. And that's an honest non-profit counselor who's making as little as possible off the deal.

The Real Danger

There's a worse danger. What if the counselor just takes your money and doesn't send it to your creditors?

I talked about a friend who quit the credit repair business, and this was what finally scared him enough to quit. Another credit counselor bought out his company, and now he was supposed to sell debt management plans. To everybody. Immediately. Debt management plans were such a cash cow for the company, they paid a nice commission every time my friend signed somebody up for one.

That's the first warning sign: if you call up a credit counselor and the first thing he or she suggests is a debt management plan. Not good. Be suspicious. The counselor may be more interested in earning a commission than doing what's best for you.

My friend would sell people on these debt management plans, but the company was short on money, so they'd use the monthly payments that people sent to pay their own bills, and tell the lenders that their clients were behind on payments.

Needless to say, this made the clients' credit look even worse than it already was and made late fees start to add up. The company could hide it from their clients because one of the benefits of having a credit counselor is that all the debt collector calls go to the counselor, so they sent fake statements to the clients and answered the collection calls themselves.

Be Careful

If you're already in a debt management plan, watch your monthly or quarterly statements like a hawk. Even better, call or write your creditors individually and ask if they're getting paid as promised and on time. Pull your credit reports and see if you're lucky enough to be marked Paid or Paying as Agreed, or at least make sure there's some sign that you're paying things off.

If you're thinking of agreeing to a debt management plan, consider your options. Make sure the company that's running it has regular audits and is bonded and licensed to be handling your money. Every state will be a little different, but you can search for debt management plans or credit counselors and your state, or contact your state's attorney general's office, to find out the local situation. See if they're a member of an organization like the National Foundation for Credit Counselors (NFCC) and/or have good marks with the Better Business Bureau and aren't plastered all over the internet with the words "scam" and "ripoff." If a debt management plan is right for you, there really are reasonably priced and honest ones out there, through reputable companies.

If you're stuck in a debt management plan and you want out because you just want out, even though they're not doing anything truly wrong except charging you way too much, it can hurt your credit. Lenders may claim that you didn't live up to your end of the bargain, so they won't work with you any more and will demand payment in full or sue. It sucks.

See if you can find a cheap, truly non-profit credit counselor to talk to your lenders and work you through it. Or talk to your lenders directly and see if they'd be willing to continue with your current agreement, if you pay them yourself instead of through the debt management plan. They may not have to pay their 15% kickback anymore, so if you've paid steadily for a while and they trust you, you might have a chance. Only don't call it a kickback. They hate that.

If you want out of a debt management plan because actual fraud has occurred, talk to a lawyer. Stop any automatic withdrawals from your bank account and don't send them any more money. See what your lawyer says, but you might want to contact all your creditors immediately, explain what's happened. Complain to your state's Attorney General, the FTC and the Better Business Bureau as well, to get the word out. This is really nasty stuff.

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10:31 p.m. February 15
Is this like debt settlement? How does it affect your credit score?


6:18 a.m. February 16
Both can be done by credit counselors, but a settlement gets companies to agree to reduce the amount you owe, if you pay back a lump sum or in short payments. A debt management plan is different. Creditors may reduce your interest or give some concessions, but it lasts longer, 3-5 years, and requires regular monthly payments. While you're in a plan you can't get new credit and your current credit cards will be put on hold so you can't spend any more on them. It will show on your credit report that you're in a plan, but if you're in a debt management plan paying loans back, that's not as good as being on time but it's not as bad as not paying at all.


8:09 a.m. February 16
Here's what Experian the credit reporting agency says about it: Link


10:05 a.m. February 16
i talked to a company and they said the first thing to do was stop paying on my bills... they said thats how u get them to come down and they coldnt do anything about it otherwise... i can barely afford to pay now but ive been tryinng to keep up... i dont want debt collectors calling...


11:21 a.m. February 16
That's nonsense. Find another place. They should be able to help you while you're trying to pay back.


10:05 a.m. February 16
Not to disagree but I can see the point of giving the company leverage. If you're paying regularly pretty much then it's hard for someone to negotiate on your behalf by saying that the creditors will only get their money if they compromise. If they're getting their money now, why should they settle for less?


10:05 a.m. February 16
What about debt consolidation? Is that the same thing?


10:54 a.m. February 16
Not quite. Debt consolidation means you take out a new loan and use it to pay the other loans back. Should give you lower monthly payments because your debt is spread out longer or has a lower interest rate. The new loan is usually backed by your house (home equity loan) or something, because otherwise it's hard to get a better deal on it.

I think a lot of these choices depend on how bad off you are and what your situation is. If you have a lot of equity in your house, decent credit so far and you can afford some kind of payments, look at home equity consolidation. If there's no way you can pay off everything in this lifetime, look for debt settlement or maybe bankruptcy. If you can pay but it hurts and you need interest rates reduced and creditors just put off a little, a debt management plan might help.

This is what a real debt counselor is supposed to do, discuss all these options, and not sell you on whatever they get the biggest commission on. Some of this stuff you can try doing yourself too, like debt settlement, if you're good at negotiating and persistent. Or debt consolidation, if you have all your debts organized and apply for a home equity loan yourself.

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