What Is Credit Counseling – How Debt Management Plans Work

What Is edit Counseling – How Debt Management Plans Work

There are a number of reasons people get into debt. Whether you’ve dealt with insufficient income and mounting bills for years, or face a new, unexpected challenge such as a big medical expense or a lost job, it can be frustrating to watch the interest pile up on your unpaid obligations – and to wonder how you’re going to make ends meet each month.

A billion-dollar industry, led by nonprofits and government as well as for-profit companies, exists to help Americans address their debt problems. Some of the services available to folks who struggle with debt include loan refinancing, debt consolidation loans, debt settlement services, and edit counseling. Many Americans choose to address mounting debt on a DIY basis, taking out unsecured loans to pay off higher-interest debt and roll their disparate obligations into a single monthly payment.

Many different organizations offer edit counseling services. Many, though not all, have nonprofit or public status. They may be standalone that only offer edit counseling services or divisions of larger entities, such as edit unions, universities, and military bases. Some for-profit banks also offer edit counseling services.

Many people come to edit counseling to establish a debt management plan (DMP) to pay down unmanageable debt. Although it’s not recommended for everyone, this can be a useful edit counseling feature.

A DMP is a binding, written agreement between you and your edit counselor to pay off some or all of your debts within a specific timeframe. Once you enroll, your counseling agency will act as the intermediary between you and any editors included in the plan. The counseling agency may negotiate interest rate or penalty fee reductions with some or all of your editors, although this isn’t guaranteed. You must make a regular, monthly deposit into an esow account, which your edit counseling firm taps to pay your editors.

DMPs come with fees, such as initial charges and monthly maintenance fees. For instance, the nonprofit agency GreenPath Debt Solutions charges a setup fee of $50 or less and a monthly fee of $75 or less. (Your monthly payment depends upon the size of your debts and number of editors involved in the plan). These fees can’t legally be collected until you’ve made at least one payment to a participating editor.

Depending on the size of your debts and your ability to pay, your DMP could take between two and five years to complete. Though your edit report will note that a edit counseling agency is paying debts on your behalf, the mere fact that you’re enrolled in a DMP won’t directly affect your FICO score.

However, most edit counseling require you to cancel participating credit cards, with the exception of one card for emergencies and other debt accounts. This is likely to cause your score to drop. It’s impossible to say how serious the effect will be or how long it will be for. But since the length of your edit history determines 15% of your FICO score, with a longer history translating to a higher score, the hit will be more painful if you’re forced to close older accounts.

Furthermore, many plans forbid you from applying for new loans or edit c for the duration. And all DMPs require hefty monthly payments without interruption. As with other debts, falling behind on your DMP payments can have a more dramatic effect on your credit score.

credit counselor with couple

Before you begin your DMP, you have to agree to its terms in a legally binding contract. Don’t sign anything without confirming the following:

Once your DMP begins, closely monitor its progress. Make sure that each editor has agreed to participate before you stop paying them directly and begin making your monthly DMP deposits. Keep checking in with your editors every month to ensure that your counseling agency is paying them on time. And check your edit counseling agency’s statements against your editors’ to confirm that any claimed interest rate reductions or fee waivers are real.

Unlike bankruptcy, which is enforced by a court and becomes a matter of public record, a DMP is both confidential and voluntary for you and your editors. But even if you face serious debt, you should exhaust options that won’t affect your edit score as much and submit to a thorough financial evaluation before beginning the process. If your edit counselor pushes you to enroll before offering other options, including a ized household budget, be skeptical.

In addition to debt management plans, edit counseling organizations offer several other services:

Reputable organizations should encourage you to try other services before signing you up for a debt management plan. acedited by the National Foundation for Credit Counseling (NFCC), an arbiter of nonprofit edit counseling services, generally offer these services for free. Those that aren’t acedited, including for-profit , may charge for certain counseling services.

Debt management plans aren’t recommended for everyone. But the budgeting advice provided by reputable edit counseling  is broadly applicable, even if you don’t have serious debts. Just sitting and talking with someone who understands finance can be immensely helpful if you live paycheck to paycheck but haven’t descended into a vicious cycle of unpaid obligations.

If you answer “yes” to the following questions, you should stick to non-DMP edit counseling services or look for another suitable alternative to a debt management plan.

A debt management plan isn’t a magic bullet. Although it can be helpful to consolidate your disparate obligations into a single monthly payment and put some distance between you and your editors, a debt management plan requires monthly payments and could hurt your edit score. If you’re confident that you can eate a sustainable budget, pay off your credit card debts, rebuild your credit rating, and eate a plan for future financial emergencies on your own, a DMP probably isn’t necessary.

debt management plan

To be truly effective, a debt management plan requires you to commit to a course of action and maintain discipline for the long haul. When your counselor presents you with a ized budget to pay down your debts and begin saving for the future, you can’t just follow it for a few weeks and then go back to old habits.

Getting out of debt takes time and demands some saifices, such as the following:

With discipline, these changes don’t have to be permanent – but they may be integral to solving your immediate debt problems.

Even if you have unmanageable debts, a debt management plan might not be the best solution. If a ushing mortgage, loan, or other secured obligation is the primary issue, speak directly to your lender about refinancing options that could lower your monthly payments without pushing you into default.

Alternatively, simply take advantage of your edit counselor’s budgeting and planning services. They can’t pay off your debts for you, but they might give you a fresh look at your finances.

However, it’s important to recognize when a DMP is the best alternative. If you’re behind on multiple edit card payments, can’t find additional fat to cut in your budget, and worry that bankruptcy might be in your future, the temporary hit to your edit rating and monthly plan payments might be worth it.

Enrolling in a debt management plan is just one of several popular options for consumers who struggle with debt. If you don’t think it’s right for you, you can explore a number of other options:

Although they don’t like to publicize it, many creditors negotiate with borrowers. After all, no one likes to take a total loss on their investment. You need to initiate this process by calling your loan officer or edit card’s service team.

A debt consolidation loan is a type of refinancing tool that rolls your existing debts into a single bundle. This is akin to a balance transfer: If you have $15,000 in total edit card debt from five different institutions, your loan will begin with a $15,000 balance. It may come with a lower interest rate than your old edit card bills, although this depends on your edit history and whether you secure the loan with collateral (such as your house).

Depending on your edit rating and history, you may be able to get a debt consolidation loan from a bank or edit union. Specialized finance companies, such as OneMain Financial, also offer these loans. If your edit isn’t , a peer-to-peer lending service such as Lending Club may be a good option too.

If you can commit to paying them off within a certain timeframe, transferring high-interest edit card balances to c with lower interest rates can significantly reduce your debts’ long-term cost. But if rates rise on the new card, you could end up back where you started. Many edit card companies entice s with 0% APR for 18 to 24 months on newly issued c, with rates rising to 15% or 20% after the introductory period.

Debt settlement providers negotiate directly with your editors to reduce your outstanding balances, providing esow accounts (similar to debt management plans) for you to fund each settlement. These companies are bound by the same that govern edit counseling , but most are for-profit, and therefore more likely to take a larger share of their clients’ savings. Like a debt management plan, debt settlement can seriously affect your edit score.

Depending on the severity of your debts, bankruptcy might be your best option. Moderate debt problems might be solved by Chapter 13 (reorganization), while intractable burdens may require Chapter 7 (liquidation). Either choice can damage your edit score, drain some of your savings, and require you to part with certain assets.

credit piggy bank

edit counseling services, including debt management plans, are available from a wide range of nonprofit sources. As with any important financial decision, it’s best not to choose your agency in a hurry. Remember that a lack of past complaints doesn’t guarantee that an agency will be above-board.

These are some good places to start:

If you or a family member belong to a credit union, talk to a representative about what (if any) edit counseling services it offers. If there’s nothing available in-house, you may be referred to a reputable outside agency.

Although edit unions such as Navy Federal offer edit counseling services to military members and their families, military bases (or armed forces branches in general) don’t directly provide them. However, military families can find reliable data about local edit counseling , including those that offer military discounts or fee waivers, at their base’s financial services office. If you’re considering joining the military with a substantial debt load on your s, this is something to keep in mind.

The U.S. Department of Housing and Urban Development (HUD) contracts with local housing authorities to provide free or low-cost edit counseling services to homeowners. The advice and budgeting support they provide is geared toward helping people avoid falling behind on their mortgages and risking foreclosure, but they’re qualified to speak about general finance issues too.

Like AICCCA, the NFCC maintains rigorous quality stand for its nonprofit members. NFCC members are prohibited from soliciting potential s with pre-seened offers (similar to pre-seened edit card offers) for debt management plans, a potentially abusive tactic, and must receive aceditation from the organization before promoting themselves. Furthermore, all member employees must be certified as edit counseling specialists.

The Financial Counseling Association of America (FCAA) is the only edit counseling trade group that’s open to for-profit organizations. Although its main function is political advocacy, it can also connect you with edit counseling that don’t advertise elsewhere.

All state governments, and many counties and cities, maintain consumer bureaus that evaluate for-profit and nonprofit edit counseling . Check your local and state government websites.

The Better Business Bureau (BBB) compiles data, complaint histories, and client feedback about the country’s independent edit counseling (both for- and nonprofit), as well as the larger organizations that offer edit counseling services. Check online or with your local branch for information about local options.

A division of the U.S. Department of Justice, the USTP maintains a database of every nonprofit edit counseling agency that offers pre-bankruptcy counseling services. Each entry has contact information, service listings, and feedback from former s.

A division of the U.S. Department of Agriculture (USDA), the U.S. Cooperative Extension System (USCES) is a financial education network that’s geared tow rural residents, but is available to anyone. Its local offices, which exist in every state, don’t directly provide debt management services, but they can connect you with reputable organizations that do – along with other financial products and services of interest to rural folks, such as USDA mortgage loans.

As purveyors of budgeting support, financial planning services, and advice about debt, most edit counseling services are reputable and well-meaning. But the debt management plans offered by many edit counselors can negatively affect your edit rating. And nonprofit status doesn’t matically confer respectability – some may use underhanded tactics to squeeze more money out of their clients.

To avoid falling prey to a scam, keep these tips in mind:

Don’t work with that require you to pay for a financial evaluation before receiving information about its services. Respectable edit counselors provide information about what they do – and how to manage your money – before charging fees or subjecting clients to invasive evaluations. Also, edit counselors that sell services by phone aren’t allowed to collect debt management plan fees, including start-up and monthly maintenance fees, until they’ve completed negotiations with all participating editors and accepted your first monthly deposit into the plan. Doing otherwise is illegal under the Federal Trade Commission’s Telemarketing Sales Rule.

Many edit counseling provide budgeting help at no cost for all participants, and some also subsidize workshops, classes, and one-on-one consultations. They may also reduce debt management plan fees for clients who face hhip. Avoid organizations that aren’t straight about what they charge, and before you enroll in a debt management plan, ensure in writing that you’ll never have to pay more than a certain amount per month.

Be skeptical of that aren’t certified by an outside organization like the AICCCA or NFCC. Ensure that their employees are certified by these organizations or have relevant financial training as well. And always confirm the source of an agency’s funding – NFCC members, which receive the bulk of their funding from editors that participate in debt management programs, are required to disclose this information.

Don’t work with that won’t agree to keep your financial and information secure and confidential.

Be cautious about working with that incentivize their employees via commission to sell debt management plans or other services. Hourly or salaried employees are more likely to have your best interests in mind.

If your chosen edit counseling agency tries to push you into a debt management plan without providing other services first, talk to other and see if they do the same. A DMP is the most luative service for , so overly pushy edit counselors may be looking out for their own bottom line, not yours.

Avoid organizations that claim to be able to repair your edit score immediately, get rid of your debts in a few months, or keep information about past edit problems (such as late payments or repossessions) from future editors. These things aren’t possible.

credit counselor with clients

Before you enroll, talk to multiple edit counseling – and other financial professionals, if possible – to make sure a DMP is right for you. You should also create a frugal but sustainable personal budget and commit to following it. This might involve some saifices, such as cutting back on vacations or restaurant meals, but it will be worth it. And if you’re already behind on multiple edit c or other debts, it may be best to seek help from a DMP now – rather than wait until you need to take even more drastic action, such as filing for bankruptcy – and work on your budget once you’re already enrolled.

Have you or a family member ever used a nonprofit edit counseling service? Would you recommend the experience, or is it better to tackle debt by other means?

Updated: October 15, 2018
Categories: Credit and Debt, Get Out of Debt

Brian Martucci writes about frugal living, entrepreneurship, and innovative ideas. When he’s not interviewing owners or investigating time- and money-saving strategies for Money ashers readers, he’s probably out exploring a new trail or sampling a novel cuisine. Find him on Twitter @Brian_Martucci.

33 Best New Bank Account Promotions & Offers – Dec 2018

20 Best Small Business Credit Cards – Reviews & Comparison

15 Best Travel Rewards Credit Cards – Reviews & Comparison

13 Best Cash Back Credit Cards – Reviews & Comparison

11 Best Ways to Make Money from Home (Legitimate)

Extreme Couponing 101: How to Extreme Coupon and Save 84%+ on Groceries

What Is edit Counseling – How Debt Management Plans Work