11 Things You Need to Know About Debt Management Companies

For many Americans, debt can feel like a mountain that’s way too tall to climb. In fact, the average amount of debt each American holds is over $90,000, a number that seems to rise year after year.

Whether you want to prevent getting too far into debt, or have some already, It’s comforting to know that there are debt management options available for everyone.

And if you’re looking for an organization that can help you through the debt prevention and repayment process, a Debt management company might offer a convenient solution. They can help you consolidate your debt, lower your fees, and eliminate those pesky calls from bill collectors.

Enrolling in their plans can be a helpful way to avoid filing for bankruptcy and can help you to gain control over your finances again. 

Unfortunately, it isn’t always as straightforward as that. Debt management companies can be extremely helpful for some people while others may not need or want their services. Let’s take a closer look at what exactly a debt management company is and what they can offer you.

What is a Debt Management Company?

If you are struggling to pay off your debts, bringing on a debt management company may be a solid move toward your success. These companies specialize in creating plans to help you pay down your debt.

They do not offer you a loan. Instead, they help to negotiate with your creditors to reduce your interest rate, monthly payments, and any fees associated with your account. 

You will work directly with a credit counseling agency to determine exactly what you can afford to pay each month. The credit counselor you work with will help you understand how to pay down your debt while still maintaining your payments on other expenses like your mortgage or car loan.

The end goal is typically to pay off all debt within a three to five year period. 

If you feel that a debt management company could be the solution for you, make sure to do some research into reputable agencies. The United States Department of Justice has a list of approved credit counseling agencies that you can use as a starting point.

Whoever you choose will help you to create a monthly budget and determine how much you can afford to pay each month. 

Anyone can make use of this service regardless of how much debt you have. There is no specific credit score requirement in order to enroll in a debt management plan. Your credit counselor will help you to determine if a debt management plan is right for you whether you owe a few thousand dollars or $50,000.

A debt management plan could be used as a preventative measure to pay down debt before you accumulate too much.

If you decide to enroll, the credit counseling agency will take over paying your bills. For a small sum of money each month, you will make one lump sum payment to the credit counseling agency.

They will then divvy up the funds and send them to each of your creditors to pay your monthly bill while reserving a small sum to cover the cost of their services. 

Here are eleven things you need to know about debt management companies to help you make the decision about what’s right for you.  

Lowering Your Interest Rates

One of the very first things a debt management company will do is negotiate a lower interest rate with your creditors. They can typically negotiate a rate that is lower by several points, ultimately saving you thousands of dollars in interest.

The annual interest rate on credit cards can sometimes be 20% or more, so tackling this first is a great first step to lowering your overall debt.

Eliminating Confusion

Depending on how many lines of credit you have open, paying your bills at the end of the month might feel confusing. You could issue a check to several agencies and banks just to cover the bare minimum of what you owe.

For example, I have several store credit cards, a credit card through my local bank, and an auto loan. At the end of each month, I may have five or six bills to pay, each to a different company. 

One of the benefits of hiring a debt management company is that they take care of issuing these payments. All of your debt will be consolidated into a single monthly payment made payable to the debt management company. From there, they will allocate the funds where they need to go. 

Making Accounts Current

Let’s be honest. We’ve all missed a payment or two at some point in our lives. With the switch to paperless statements, my email inbox is often flooded with a collection of messages about current sales and promotions as well as my monthly statements.

It’s easy to overlook those emails that contain your monthly statement, especially when you are in a hurry to mark everything as junk mail. I’ve missed several payments this way due to careless errors in checking my email, resulting in whopping late fees that can sometimes double what I owe on my credit cards. 

Whether it simply slipped your mind or you were missing the money to pay, letting your account become past due can wreak havoc on your finances. Missing payments come with late fees and an increased balance that is due.

A debt management company would have made paying these bills so much easier. They take your single monthly payment and divide it up to send to your creditors as necessary. 

Debt management companies can also negotiate with your creditors to re-age your account. This means that creditors could consider waiving your late fees and bring your account status back to current.

Of course, they aren’t likely to do this right away. They want to see that you can be regular in paying your bills first. It often requires several consistent monthly payments through the debt management company first. 

Your Credit May Take a Hit at First

Count up how many cards you have in your wallet. I have seven cards, each to a different store or through a different bank. Debt management companies often require you to close accounts that you are not currently using.

While this is a good practice to keep you from spending more than you should and effectively ruining your debt management plan, it can cause damage to your credit. 

If you had those lines of credit open for a long time, you will immediately lose access to that history. This can cost you on your credit report. When you close a credit account, you no longer have access to that history or that credit limit.

This means that you will have a higher credit utilization rate, meaning that you are using a higher percentage of your available credit. Lenders view this as a potential risk. 

However, debt management is likely to boost your credit score in the long run if you stick with it. It will lower the amount of credit that you are currently using until you are in the healthier range that lenders prefer to see (typically 30 percent or less).

Regular payments made on time can improve your credit score significantly if you remain consistent with it long-term. 

Setup Takes Time

As I said before, missing a payment on any one of your bills may end up costing you more than it was worth to pay the bill in the first place.

That’s what it’s important to make sure you know when your debt management plan goes into effect, and to keep making your regular payments until the plan is fully in motion.

Sometimes, it can take a month or two to set up your payments and get them over to your creditors. In the meantime, you don’t want to skip a payment because it can damage your already-fragile credit and cost you in late fees.

Do everything you can to keep your accounts current until your debt management plan starts making payments on your behalf. 

Fewer Phone Calls

The higher your debt, the more phone calls you’ll get from debt collectors looking for you to pay up. However, when you work with a debt management company, you can essentially pass all of the phones off to them.

They will help you make your accounts current so that collectors have no reason to contact you. Plus, once you’re set up, your monthly payment with them ensures that you never have another late payment again. 

Debt Management Isn’t Free

Some debt management companies pull you in with promises of a free evaluation. They may even boast a non-profit status. But rest assured, they are collecting money to cover their costs. Debt management companies frequently charge a nominal setup fee to get you started.

They may also charge somewhere between $20 and $70 in monthly fees for managing your debt for you. 

Debt management companies come up with a plan to pay down your debt. They collect this monthly payment and then allocate those funds to pay your creditors. In exchange for handling these funds and issuing payments on your behalf, they collect a small sum of their own.

The convenience may be worth it to you, but it will cost you more than handling your debt solo. 

You Can Call Solo

While it may sound convenient to bring on a debt management company, you might be able to save more money by doing the work yourself. You can avoid that pesky monthly fee by paying each bill on your own. 

However, if you decide to pay your bills on your own, you might lose out on one of the biggest assets a debt management company can offer. Oftentimes, these companies contact your creditors to negotiate things like reduced interest rates and lower fees.

It can seem intimidating to do this on your own at first, but it could yield big results like lower interest rates, waived late fees, and delayed payment. Many creditors will want to help you avoid the dreaded B-word – bankruptcy. 

No More Credit Lines

I know what you’re thinking. Your refrigerator is on the fritz and a store credit card could help you purchase a new one without forking over the cash immediately.

If you decide to hire a debt management company to help you solve your credit issues, you won’t be able to open any new lines of credit. 

This is a good thing, as you should be focusing on paying down your debt instead of accumulating more. However, it can feel inconvenient when you don’t have the funds to purchase what you want or need. 

Some Debts are Excluded

It might seem like a debt management company is the solution if you have a solid amount of debt built up, but be sure to read the fine print. Many companies will exclude certain types of debt such as student loans, auto loans, and mortgages. They only include unsecured debt such as some credit card debt, personal loans, or medical bills.

A debt management plan typically includes only those debts that are not backed by collateral. 

For other types of debt, your representative and financial counselor will likely give you some advice on paying down this debt, but they won’t include it in your official payoff program.

Keep in mind that you can pick and choose which debts you include in the plan, as long as they are unsecured debts. 

For instance, your credit card debt is unsecured because the money you use is not backed by a creditor or other financial institution. In this case, if you don’t pay your bills, there is no physical asset that can be returned to your credit card company as a form of repayment.

These loans are unsecured because if you don’t pay, the credit company has no other way of receiving those lost funds.

However, your mortgage or auto loan is secured because your home or vehicles can be used as collateral, which means if you miss enough payments, the loan issuer can repossess your house or car as a form of repayment.

These loans are secured because whether or not you pay, the loan issuer will receive something in return.

You Must Take Control 

A debt management plan can be a great tool to get your finances back to a healthy place. Unfortunately, they don’t do much for you if you aren’t willing to take a closer look at the spending habits that got you here in the first place.

Working with a debt management program makes it more difficult for you to open new lines of credit and continue spending money you don’t have. The question is, what happens when you have officially paid off your debt? 

The best thing you can do for yourself is to take control of your finances and spending habits now. If you don’t know much about personal finances, educate yourself. Hire on a financial planner to help you make a budget, to see where you can make cuts in your monthly expenses, and help you learn from your mistakes.

If you really want to avoid going into debt again, taking control of your finances is absolutely crucial. 

Is Debt Management Right for You? 

Debt management can be essential to help you get a grip on your credit, but it isn’t for everyone. Weigh the advantages of hiring a debt management company heavily before making the decision about what’s right for you!

If you are ready to take the first step toward lowering your interest rates, reducing your monthly payments, and making a game plan to pay off your debt in the next few years, find a credit counseling agency in your state through the United States Department of Justice.

A credit counselor can help you to unlock all of the advantages you found listed here.

Contributor’s opinions are their own. Always do your own due diligence before investing.

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