Debt Management Plans: When It Makes Sense and When It Doesn’t

Many people who encounter financial hardship and fall behind on their credit card payments may consider a debt management plan. [i]  In the standard debt management plan, a third party contacts the credit card companies on behalf of the consumer, and negotiates a reduced monthly payment.  The consumer then pays a monthly payment to the third party debt management agency, who then divides the money up among the credit card companies.  The typical debt management plan will last between 3-5 years, and at the successful conclusion of the plan, the balances are paid in full.  In order to secure lower monthly payments, the debt counseling agency will compromise with the credit card companies on monthly payments, interest and late fees.  The debt counseling agency will review your income, expenses and amount of debt to calculate a proposed payment.  While this can be an efficient non-bankruptcy option to address credit card debt, it is important to be realistic and consider the following factors.

1)      Verify the credentials of the debt counseling agency!  The industry has been overrun by a lot of less than reputable companies that have no interest in helping consumers.  You will be providing your social security number, credit history and access to your bank account to the debt counseling agency, so do your due diligence.  Talk to your credit card companies and see if they will work with the agency that you have chosen.  If you don’t feel comfortable for any reason, do not use the agency.

2)      Participation by your creditors is voluntary.  If some creditors refuse to be included, you could still face the same monthly payments on that debt.  Even worse, your payments could go up if you have missed any payments during the credit counseling process.  As a result, you need to make sure that all of the creditors will be included, otherwise you could still field collection calls and lawsuits from the creditors who won’t participate.   The fewer creditors that you have, the more likely it is that the plan will be successful

3)      Make sure that the monthly payment will be affordable!  If you are unable to make the proposed payment, you will be in default and will trigger the release of your creditors from their agreement to participate in the plan.  You will not only wind up back where you started – depending upon how long you were in the repayment plan – but may actually be worse off as many of the companies will recalculate the balance based on the original interest rate and not the reduced rate which was negotiated.

4)      Realize that you will not be permitted to use credit cards as a condition of the debt management plan, so you will be a cash consumer.  You will not have access to credit in the event of emergency, unless you want to void the debt management plan.

5)      Keep in mind that the accounts that are included in the debt management plan will probably still have negative ratings on your credit report until they are paid off.  As a result, you may not see any immediate improvement in your credit, even if you are making the payments on a timely basis.

Most of the bankruptcy law firms in the Augusta area offer a free consultation.  It would certainly make sense to meet with a bankruptcy attorney so that you can consider all of the options, and decide which avenue will provide the necessary relief for you and your family.  Also keep in mind that a Chapter 13 bankruptcy does offer a court-supervise repayment plan in which participation by your creditors is not voluntary.   So a consumer who wants to repay their creditors but wants to avoid the risks of a debt management plan could still opt for a Chapter 13 and repay their debts in that manner.

[i] A debt management plan is not to be confused with a debt settlement program, where money is collected over time – usually by a law firm – and then lump-sum settlements are proposed to individual creditors for reduced amounts.  These type of plans are rarely successful and highly discouraged.