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What You Should Know about Debt Management

  April 20, 2021  |    #Eliminate Debt

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The good the bad and the ugly about debt management

So, you’re ready to make that debt disappear once and for all, and you’re thinking of hiring a debt management company. Here’s everything you need to know about debt management.

Howard Dvorkin of Debt.com on what you should know about debt management:

What’s a debt management plan?

A debt management plan is a strategy to combine your debt payments into one place at a third party, typically a credit counselor, for the benefit of a lower interest rate and payment of your debt within five years.

What are the benefits of a debt management plan?

Debt management is a popular solution that many choose to help them pay off their debt. That’s because there are several benefits of a debt management plan.

1. You’ll get professional help

The factors that many people who struggle with paying their debt off on their own are lack of coaching and lack of accountability. Hiring a debt management company, such as Debt.com, helps with both of those factors.

Look! Not everyone’s in finance. Don’t expect that you’re perfect with money when it’s not your thing. Even if it is your thing, we can all benefit from second opinions and accountability. That’s why Lebron James still has a basketball coach. It’s why Patty LuPone still has a vocal coach.

Professional help helps us reach our goals. That’s worth the investment.

2. Can cut interest rates by half

The single biggest fact that keeps people from paying off their debts is high interest rates. High interest rates can make it seem like you’re making no progress with paying off your debt at all if you’re only using either the Debt Snowball or the Debt Avalanche methods.

Debt management companies also have the experience and the leverage to negotiate with creditors to often, not always, lower your interest rates. With their help, you can often lower your net minimum monthly payments.

3. Can expedite paying off debt

The combination of having support and accountability and lower net interest payment will help expedite paying off your debt. It’s because people don’t have support during the hard times, and they have no leverage to negotiate down their high interest rates that people stay stuck in debt – the system’s designed that way – for a reason.

When you hire a debt management company, you eliminate those factors that make it take too long for most people to become debt free.

When you’re playing the minimum payment game, 75% of your payment goes toward interest. With a good debt management plan, we’re able to flip that on its head. - Howard Dvorkin of Debt.comClick To Tweet

4. Consolidates debt into a single payment

Probably the single best tangible factor in working with a debt management company is the consolidation of your debt payments. In most cases, your debt management company will handle the disbursement of all your debt payments on your behalf.

What’s even nicer is that these single payments to the debt management company can be done automatically and electronically via direct deposit or electronic funds transfer (EFT). This way you can remove yourself from the process. This can psychologically feel like you’re paying your debt off faster because you’re not writing a check or sending a payment month after month.

You still, however, want to oversee that everything’s being done properly. Ultimately, whatever debt management company you choose, they’re your contractor and you’re their client. So, you want to be sure that they’re doing their job properly.

5. Stop bill collectors calling

We can all benefit from fewer phone calls, especially ones that remind us of something we’re struggling with doing. If one of your frustrations with falling behind on your debt payments is bill collectors calling you, working with a debt management company will eliminate that.

That said, under the FDCPA, you can always tell a debt collector to stop calling you and they’re legally required to stop. In many cases, though, this isn’t wise to do. If you’ve hired a debt management company and you’re certain your debt payments are being sent every single month, simply tell any debt collector who calls that you’ve hired a debt management company and that the debt collector can refer any questions to your debt management company.

6. May improve peace of mind

The peace of mind that comes when you have a plan in place let alone a plan that’s working can’t be overstated. When we mapped our plan to pay off our $51,000 in credit card debt and estimated when we’d finally be debt free was life-changing. While we knew that we had a few years of hard work ahead of us, just knowing that we had a plan transformed our attitude about our debt and ourselves.

After hiring and working with a debt management company, you’ll also have a plan and having that plan is the start of turning everything around.

7. Eventually, you’ll become debt free

Okay, the single best benefit with hiring a debt management company is that, if you stay committed and you’ve hired a legit debt management company like Debt.com, is that you’ll eventually become debt free.

We’d say that’s a benefit that can’t be quantified except for the fact that it can be. If you’re at the point when you’re ready to hire help to pay off your debt, you’re likely paying thousands of dollars a year in credit card interest payments.

We calculated that we were paying $10,000 a year in credit card interest payments. $10,000 a year! What would you do with an extra $10,000 a year? Well, when you finally pay off your debt, you’ll likely find out.

Hopefully, it’s building your emergency savings account, investing in the stock market, buying real estate, starting your own business and giving to your community. That’s waaaaay better than giving to banks that will do just fine without you.

So, finally becoming debt free is the ultimate benefit.

What are the disadvantages of debt management?

With all the benefits of debt management, as with all good things, it has its drawbacks. Here are the biggest disadvantages of debt management.

1. Debt management doesn’t include all debt

Debt management is generally only available for unsecured debt, such as credit card debt. Secured debt, such as an auto or a home loan, has the car or the house collateral that the bank can repossess if you’re unable to meet your obligations.

Likewise, some creditors for unsecured debt won’t participate in a debt management program. They simply don’t need to do so. When you assumed the debt, you agreed to the terms and conditions of assuming that debt. As with debt settlements, your creditors have no legal responsibility to change the terms and conditions.

2. You’ll be working with a middleman

Yes, it’s nice to have a coach and someone to keep you accountable to your goal of becoming debt free, you’ll also be relying on a third party to withdraw and disburse your payments. You’ll have someone else to consider in your financial decisions.

You’ll have less control, which brings us to our next point.

3. You’ll have less control (though this temporarily be a good thing)

Having less control now may be a good thing because, if you’re considering hiring a debt management company you likely haven’t had good control of your credit until now. But while you’re paying the debt management company and taking advantage of any flexible terms and conditions they negotiated on your behalf, they’ll be responsible for your debt pay-off plan and affect your access to additional credit.

That could, at some point, be a pain.

4. There are often hidden fees

The fees for working with a debt management company can be expensive. You’ll typically pay a set-up fee that will run between $50 to $100. Then, you’ll likely pay an ongoing, monthly fee between $25 to $100.

If the debt management company you hire is worth its salt, it’ll save you money over the long term. That said, hiring a debt management company is just that, hiring a company and paying for its services.

Finally, some though not all debt management companies charge a fee to close your account with them whether you simply stop the debt management program midway or once all your debt that they managed for you is paid off.

5. You’ll likely have fewer breaks

Creditors don’t typically appreciate it when you bring in strong arms like attorneys and debt management companies. It makes their job harder. If they’re amenable to negotiations, they know they’ll be taking a loss relative to your initial terms and conditions. Therefore, they’ll likely offer you fewer breaks than what you may have been able to negotiate for yourself.

6. You’ll lose access to credit

Two of the conditions you may be required to agree to in working with a debt management company are one, they may require you to close some or all of your credit cards and two, they may prevent you from opening new lines of credit.

This is because their success is your success. So, they don’t want you racking up debt while they’re trying to pay off your debt. That’s a lose/lose.

7. It doesn’t address spending behavior

Finally, and many most problematic of all, working with a debt management agency doesn’t necessarily solve the problem that got you into debt in the first place. Most people, not all, get into debt because they spend as much or more than they earn, and they don’t have a cushion with an emergency savings account.

This is why the story of someone getting a personal loan to pay off their credit card debt only to acquire more credit card debt and have twice the amount as when they started is so common. This is also why many people file bankruptcy multiple times and why folks need to hire debt management companies more than once.

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Yours truly hired a debt management company. The debt management company was great and did everything they said they’d do. We were horrible clients. We ultimately closed our account and amassed our credit card debt again simply because we didn’t change our behavior.

Not until we changed our behavior would any debt reduction plan work.

Does debt management affect your credit score?

Hiring a debt management company and getting on a debt management plan won’t directly affect your credit score, but it may be added to your credit report. In that way, it may act as a red flag to future lenders that they may not get all of their money back from you.

Also, if as we mentioned above, your debt management company closes your credit card accounts will increase your credit utilization and that may bring down your credit score.

Your credit utilization is the amount of available debt that you’re using. The smaller your credit line, the larger your credit utilization even for small loans.

Closing your credit cards may not affect your credit history, at least not immediately. Your credit history, for that matter, plays a bigger role in your credit score.

When would I consider debt management?

Not everyone should consider a debt management plan. In some cases, it doesn’t make sense or isn’t appropriate. If you’re considering a debt management plan, be sure to meet these three benchmarks.

1. Unsecured debt is over 15%

You only want to hire a debt management company and assume the fees and restrictions if you’re unsecured debt, such as credit card debt, is more than 15% of your annual income. This is a good threshold to meet before assuming the cons of a debt management plan.

If your unsecured debt is below 15% of your annual income, you could likely pay off your debt on your own with a simple strategy and self-control. You can do it. Really.

2. You have a job

For that matter, you should have a job if you hire a debt management company. Again, most Americans have a spending problem and not an income problem. But if you don’t have a job – you don’t have income – a debt management plan won’t be able to help you enough to offset the costs of its services.

3. You won’t need more credit lines soon

Your debt management plan will prohibit you from accessing additional lines of credit and may even require that you close current lines of credit to which you have access. Therefore, you’ll want to be sure you won’t need to access more credit and ruin the whole plan and make your life harder.

If you meet these three benchmarks and are okay with the list of cons above, hiring a debt management company such as Debt.com may make sense.

Are non-profit debt management companies better than for-profit debt management companies?

No, not necessarily. Whether they’re non-profit or for-profit, all debt management companies need to make money. Non-profits in all industries are known to make a lot of money. Some just cloak themselves under the business type non-profit and appear more altruistic.

At the end of the day, hiring a debt management company is a business transaction. Therefore, read and understand the fine print of your contract. Understand the debt management agency’s responsibilities and understand your responsibilities and be sure you can live with those terms and conditions. Know that you need help and that the non-profit or for-profit debt management agency still must make a buck.

What alternatives are there to debt management?

A debt management plan isn’t the only game in town for paying off debt. You have a few alternatives.

1. A debt settlement

Debt settlement is a way of paying a lender, usually with a large, lump-sum payment, up to 50% less than what you owe. A third party or an attorney typically negotiates the terms of your reduced balanced due on your behalf.

Click here for more information on debt settlements.

2. Filing bankruptcy

Bankruptcy’s a legal maneuver filed in a federal court to eliminate outstanding debts. It gives you a “do-over” if they’ve acquired more debt than you can repay.

Click here to learn more about filing for bankruptcy.

3. Signing up for the Debt Free Guys’ Credit Card Pay Off Plan

The Credit Card Pay Off Plan is the fastest way to pay off credit card debt, save more money than any other credit card pay off method and get your credit score over 750. It gives you the coaching and accountability you want all for a ton less than any other method discussed above.

Click here to learn more about the Credit Card Pay Off Plan.

Resources for debt management

For more help with your money, click one of these:

Note: This article contains affiliate links, meaning we’ll receive payment at no cost to you if you buy through these links. We only recommend products we use or thoroughly vet and would recommend to our moms.  Buying too many of these is how you live fabulously broke. To live fabulously with financial security, start here.

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