Debt Management Program: How They Work
It shouldn’t be too hard to figure out if you’ve got a serious debt problem, but some people remain in denial of the fact anyway. Some red flags:
- Monthly minimum credit card debt management payments are in excess of 20% of your take-home pay
- You have several open, delinquent accounts
- You’re dumping credit card balances onto another card
- You’re getting cash advances to pay off balances on other cards
- You’ve hit the max limit on your cards
If you’re in this deep of a hole, it can start getting very, very difficult to get out, especially once the late fees and charges start to pile up. If that’s the case, you may be a good candidate for a debt management program.
How The Programs Work
These are the steps a debt management program will typically take:
- Assessing how much you actually owe and how much you’ll pay in interest and fees while in the program, then cutting a deal with your credit card companies to lower interest and waive some fees.
- Taking a hard look at your monthly income and expenses in order to get an idea of how big a payment you can take on.
- Putting you on a three-to-five-year repayment plan. This will be calculated according to how much debt you are carrying and how much you can afford to pay.
- Spreading your payments around with your various creditors.
The biggest advantage to using debt management programs is the fact that you’ll stay out of bankruptcy court, and can hopefully not have to resort to harsher measures to cure your credit card debt. There are plenty of non-profits consumer credit counseling services who can step in and provide this suite of services.
The down side of credit card debt management services is that the IRS will consider your written-off debt as income; you will most likely be paying on that at the end of the year. Also, in some cases, going through a credit card debt management service can have a negative effect on your credit rating. That may seem grossly unfair, since by signing up to the program you’re doing your best to make good on your debts, but that’s the way it works.
Signs a Debt Management Program Might be a Scam
Unfortunately, as hard times mount, more companies see a buck to be made, and some are less than scrupulous. Does the counselor take less than 30 minutes to discuss the program with you? Do they require a month’s payment as an initiation fee? Do they discourage you from reading the contract before signing? Do they ask for “voluntary” contributions? These are all warning signs; if so, turn around and get out of Dodge. As always, check with the BBB and trust your gut instincts. Otherwise you may get stuck in a program that will do you more harm than good.
Remember that there’s no free ride; all these programs are out to make a profit from your payments to them. Even if everything else smells right, it’s worth your time to comparison-shop between programs to see who’s going to have more competitive rates.
What the better, more reputable services will do is help you readjust your spending habits. This step may be more important than any of the other services available. Americans are used to living beyond their means, as individuals and as a society. It’s a pattern that can’t continue, and if you can’t adapt to living within your means, you’re likely to wind up in the same nasty situation a few years down the line.