Sometimes people who have accumulated debts from a range of creditors, and feel "over their heads" in keeping track of their debts and paying their bills, will consider using a debt management service, usually through a credit counselor . Before you sign up with a debt management service, you should make sure that you will be comfortable with the service, and that the service you use will act in your financial best interests.
What Is Debt Management
A debt management service acts as a middleman between you and your creditors, obtaining a single monthly payment from you and then paying off various debts on your behalf. The service receives a commission, usually a percentage of your monthly payment, and possibly additional rebates from your creditors.
Debt management companies may be willing to make payments on all of your debts, but their services relate primarily to unsecured debts, such as credit cards. Debt management, of itself, is not the same as "credit counseling", and it is not suitable for every person who is in financial distress. People whose debt is primarily secured, for example in the form of a home mortgage or car loan, will usually get little benefit from debt management.
A different type of service will provide a debt consolidation loan to pay off some or all of your existing debt, and replace it with a single loan and a single payment. Ordinarily, once the consolidation loan is issued the consolidation service takes no further action on your behalf, and you are solely responsible to make payments on your loan.
Effect On Your Credit
If your debt management service negotiates reduced interest rates or balance reductions on your behalf, those negotiations will likely be reflected on your credit record. Thus, some (but not all) creditors may treat you as a higher risk when issuing future credit. However, the effect on your credit is ordinarily far less significant than that of a continuing pattern of late and missed payments. Also, if you forego debt management and end up having to file for bankruptcy, all creditors will view you as a higher credit risk.
It is not unusual for a debt management service to obtain a commission of 10% or more on your monthly payment. It is possible also that the consolidator will be able to obtain a rebate from your lenders on the amount of each montly payment they make on your behalf, resulting in an even greater commission. The chance for significant, easy profits can inspire unethical debt management services to encourage people to sign up for services which are not in their best financial interest.
Given that many people have difficulty sticking with a debt management program, or encounter sudden financial emergencies during the course of a debt repayment plan, it makes sense to ask up front what will happen if you miss a payment, are late with a payment, or may not be able to make your full contribution.
Nonprofit Debt Management?
When private debt management services started to emerge in large numbers, people were frequently advised to obtain help only from nonprofit debt management services. The idea was that the for profit services would often seek to obtain excessive commissions, while nonprofit services were performing a public service. However, there is an enormous difference between being "nonprofit" and being a "charitable organization", and many profiteering debt consolidation services operate (or claim to operate) as "nonprofit" companies. Just because an organization declares itself to be "nonprofit" doesn't mean that it is necessarily either better or cheaper than a "for profit" service.
However the service chooses to label itself, play it safe by using credit counseling and debt management services accredited through the Association of Independent Consumer Credit Counseling Agencies or the National Foundation for Credit Counseling . It is far less likely that an accredited organization will charge excessive fees or try to take advantage of you, than it is for an organization which is not accredited.
Before you sign on for a "debt consolidation" loan, consider your alternatives:
Negotiate With Your Creditors - Sometimes your creditors will offer you a lower interest rate, or will waive certain fees associated with your accounts, if you simply call them up and ask. This is most often true of credit card companies.
Debt Consolidation - You may be better served by utilizing a debt management service. With a debt management plan, you deposit an amount of money each month with a service which pays your bills for you. Sometimes creditors will work with your debt management service to offer reduced interest rates or waive certain fees associated with your account.
Using a Traditional Lender - You may also be better served by using a traditional lender, as opposed to a debt consolidation service.
Unsecured Loans - If your credit is relatively good and you are employed, you may be able to obtain an unsecured "personal" loan which you can use to pay off some of your higher interest debt, such as your credit card debt.
Secured Loans - As many debt consolidation services will use your home as collateral, you may well be best served by refinancing your home or obtaining a home equity loan , and using the proceeds to pay off your debts.
Bankruptcy - There is a possibility that your best option is to declare bankruptcy . If all consolidation will do is forestall an inevitable bankruptcy, consider whether you will be better served by proceeding directly to bankruptcy.
Signs of Trouble
If you made a timely monthly payment to your debt management service, but it nonetheless was late with or failed to make one or more of your payments to your creditors, you should find out why. If the service is careless with paying your debts on time, it may be hurting your credit. Also, if the service is charging you additional fees you didn't understand, and is applying part of your monthly payment to those fees instead of paying your creditor, you may wish to discontinue the service.
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