Debt Management Plans
When you begin to investigate Debt Management, Debt Negotiation, or Debt Settlement Programs be careful. There are disreputable companies that will claim that they can significantly reduce the balance of your debt, or wipe all the negatives clean from your credit report overnight. Don’t believe any claim that sounds too good to be true because it probably is. They may even tell you to stop making payments to your creditors while they are charging you their own fees. This will only cause you to add to the negative marks on your credit record because you will be late on payments. These companies will finally contact your creditors once your accounts have become delinquent and ask them to then define your debt as uncollectible. The creditors may then be willing to accept less than total amount you owe, hoping to at least collect something. This may reduce your balance, but your credit score will be in even worse shape than it was, and, to add insult to injury, the IRS will actually consider whatever debt that was wiped off the books to be part of your income. In other words, you will be taxed on that amount.
If these people do manage to clean up your score, the result will be temporary at best. They may decide to simply dispute everything in your credit report. While the dispute is being investigated, the credit reporting agencies will remove all of the disputed items temporarily. At that point, these companies may send you clean credit reports to prove that they have been successful. But once the credit bureaus actually complete the investigations, they will verify that the negative information is valid, and it will quickly be put back on your credit report. In the end, you will be left with the same bad credit you started with. By then, these so-called counselors will have collected their fees from you and may suddenly become impossible to reach.
This is not to say that it isn’t a good idea to consult a credit counselor, but you must have realistic expectations. If they do their job well, a credit counselor will guide you toward a plan that may be lengthy and disciplined, but will accomplish your goal of getting your debt under control.
If your credit card debt is out of control, you may actually need a Debt Management Plan (DMP). A DMP should only be used as a last resort. If a reputable credit counselor recommends one to you, it should come with a budget and some education and advice on money management skills for your future. Responsible companies know that they will be paid over time, and only through making regular payments and paying off your debt will your credit score begin to rise.
This plan, when handled appropriately, is an arrangement between you, your creditors, and the credit counselors. Through the DMP, you deposit money each month with the credit counselors. They then use that money to pay off your debts based on a schedule that they have negotiated with your creditors. They do try to get your creditors to agree to lower your interest rates or waive certain fees, but they don’t ask you to make your credit situation worse before they do so. If you do decide on a DMP, you will need to know which of your creditors are involved. You may still have some outstanding debts that you will have to pay separately. You will also need to avoid creating any new debt while you are trying to pay off your current balance(s).
DMPs can actually be very effective, but be careful of disreputable firms that make unrealistic promises. Be prepared for a DMP to stretch out over a long period of time, but if you follow the plan, you should eventually find yourself debt-free