Debt Management Programs: Pros and Cons
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Considering a Debt Management Program? Money Management Pros and Cons
Credit can be a wonderful thing. For example, credit cards are safer and more convenient than carrying cash, particularly when you are traveling. But too much of a good thing can be a bad thing. Downturns in the economy, or even poor financial management, can result in out-of-control debt that leaves you with too much month at the end of your money. You might consider entering a debt management program to help solve your money woes, but it's wise to examine the pros and cons before you sign on the dotted line.
Debt Management Program
A debt management program, sometimes referred to as a debt management plan or DMP, is a formal agreement between you and a third party, which could be a non-profit credit counseling agency or a for-profit company. The third party negotiates a voluntary debt repayment plan with all of your creditors. You pay the third party a single monthly payment, and the third party distributes the money to your creditors. If all goes according to the plan, within 60 months or less you should be caught up and out of debt.
Most legitimate DMPs require you to take a credit counseling or debt management class that will help you understand how to better manage your household budget, so that once you've completed the plan you'll have a better chance of avoiding excess debt in the future. A DMP will help you assess your total financial situation and create a manageable budget. The company will negotiate with your creditors on your behalf, which might result in reduced interest rates, waiver of certain fees and expenses and fewer debt collection calls. Your financial obligations are simplified, because you make one monthly payment, rather than juggling multiple bills. Once you successfully complete the program you are back on solid financial footing.
Financial stress and anxiety brought on by excess debt can result in people desperately grasping at straws. "There are plenty of unscrupulous scam artists who are willing to prey on desperate people by offering unrealistic results, often for an unreasonably high fees," says Jana Castanon, community outreach coordinator for Apprisen. "Before you sign up for a debt management program, make sure the company is accredited by the Better Business Bureau and is a member of the National Foundation for Credit Counseling." Disreputable DMP companies might not pay your creditors on time or at all. There are challenges even with reputable DMP organizations. You must complete the plan as promised or all of the benefits fall to the wayside. If your credit score isn't already trashed, it will take a hit once you enter a DMP. A status statement will be added to your credit report noting that your accounts are not being paid as agreed but at a reduced rate through a DMP.
Alternatives to a DMP
As soon as you realize you are having financial difficulties, take a good, hard look at your household budget. Determine if you are making the wisest use of your money. It's possible you can meet your obligations by prioritizing your needs and making some changes to your financial habits. If it looks like you are not going to be able to make all of your payments as agreed, the worst thing you can do is hide. Contact your creditors immediately and explain the situation. They might be able to offer the same types of terms a DMP negotiator could obtain. In a worst-case scenario, if your circumstances have turned so negative that there is simply no chance of digging out of your debt, the Federal Bankruptcy Code offers relief for honest but unfortunate debtors to make a fresh financial start.