Debt Management Plans pros, cons, and FAQ.
While everyone’s circumstances differ, many consumers what to know the various options they have when it comes to a Debt Management Plan. Some borrowers find them complicated or they are not sure whether they should enroll into one. Find below what the pros and cons of a DMP are.
Since the company you choose to do business with is very important, and is at least as important as the type of plans or settlement you chose, lets touch upon the companies first.
There are both for profit and nonprofit credit counseling agencies that provide this service. The IRS and the Federal Trade Commission have established both certification and accreditation programs as the gold standard for companies in the industry. You should always ask about this before entering into a DMP as using a certified company is a pro. Ask to see both counselor certification and third-party accreditation from any company you work with.
Once you find a company, a counselor should spend about an hour with you going over your financial condition and specific situation, and you should also receive a written action plan from them. All initial counseling sessions should be free of charge, which is a huge pro as it is technically free up to this point. Any monthly fees that you end up paying for a debt management plan should be disclosed upfront (insist on this) and in most cases should not exceed about $40-$50 per month. Be sure to read the find print of any contract.
One of the pros of debt settlement companies is that many will try to eliminate or reduce the amount of debt that you owe to all of the creditors, not just one or two. This means your principal, or a significant part of it, can be eliminated.
There are also law firms that perform debt settlement work. Attorneys by nature need to have extensive ethics and standards in place when they operate, and they also need to have a professional code of conduct. You should use a local law firm if at all possible to help you, so if there are any issues or additional negotiations that may arise then the activities can be handled face to face. Click here to read more about attorneys that can help consumers eliminate unpaid bills and debts.
Now, find some of the frequently asked questions (FAQ, and additional pros and cons. This will cover some of the differences in how debt settlement and credit counseling work and how each will affect both your credit scores and monthly bills. So people want to do this process on their own, so they can read how to start a DMP.
Pros and Cons of Debt Management Plans
In order to receive lower interest rates, and to pay lower fees, many consumers who receive assistance in the form of credit counseling will decide to enter into a debt management plan with one of the many providers out there. Under these plans, a consumer will pay a specified monthly payment directly to the credit counseling agency. The amount will be based on what exactly the family owes and what (if anything) the counselor could get written off. Then once the agency receives the payment from the client, the company will disburse those payments to the consumer’s creditors.
The debt management plans will vary in length, and they will often run from 36 months to 60 months. Any accounts, such as credit cards, personal loans or other bills that the household owes, that are included in a debt plan must be closed during this time frame. This is a pro to using this resource as it prevents the person from running up further debts in their name..
While the amount you need to pay for this service will vary, overall the fees for a debt management plan should be fairly low, and they should even be waived or reduced if you can’t afford to pay them. This is one of the pros to using a non-profit, as they may offer a DMP for free to very low income clients. Any enrollment fee that you pay should not exceed $100, but most times they will be less.
After an account you have that needs attention is placed into a debt management plan, any collection calls should stop within a month or two once payments begin to your creditors. This is obviously a major pro as it can tremendously reduce the stress of the borrower.
If you enroll in a debt management plan, it will not impact your FICO score or credit ratings. This is a pro. However, you do need to know how your lenders and creditors decide to report your accounts to the three credit bureaus, as it can affect your score. So be on the lookout. Find several of the other top criteria and things to know about debt management plans. Continue.
Compare that to a debt settlement company
Settlement is another approach to take, and is an alternative to a DMP. These providers will typically charge a higher enrollment fee and they will require that you pay a monthly amount to the debt settlement company. The money you pay them is then placed into an account for payment directly to your creditors at some future date.
The process can sometimes take time, as the money that you pay into the account will need to accumulate to an amount that is equal to 20 percent to 50 percent of the total outstanding debt you owe before it’s paid out. A pro of this approach is that an attorney’s escrow account usually has built-in safeguards so your money is safe at all times. Learn more on debt settlement companies.
However, a con of this settlement approach (when compared to a Debt Management Plan) is that many people do not realize that until the escrow account is funded to that 20-50% range, you will continue to be subject to collector calls and/or actions taken by those companies. Also, during this timeframe, your credit ratings may in fact decrease.
Even after the money has been saved, if a lender refuses to settle with you on your debts and bills, you could end up in court, fighting with your creditor, and your wages could even be garnished in some situations. This is a major con when compared to a debt management plan, as a DMP will very rarely involve legal action or lawsuits.
So even if you decide to pay off and settle your unpaid debt, your credit may very well begin to reflect higher charge offs, increasing delinquency, and the possible court actions that may occur as a result of this approach, which can be a con when trying to borrower in the future.
A pro of using an attorney for debt help as part of DMP or settlement is that if you use a lawyer to offer this service and end up in the court process, a “non-attorney” debt settlement company may drop the account. They may instead end up referring the client to another company. They will sometimes to this as any assistance they are providing you needs to end as they are allowed to give legal advice, so then you may need to go to the lawyer for enrollment into a debt management plan anyway.