The Pros & Cons Of Using Debt Management Plans

July 25, 2017

Back in my twenties, I found myself bored with life and looking for a change. For most people, a new hair cut and outfit might suffice, but I decided to join the Army. I wish I had some deep, thoughtful, spiritual answer as to why I enlisted, but essentially, I was bored.

While in the Army, I was introduced to a whole new world of “necessities,” such as making sure the brand of my shoes matched the brand of clothing I was wearing. This new “necessity shopping” was expensive, but luckily Visa, MasterCard and Discover came to the rescue — mind you, this was before I was a financial planner, so a bit clueless to the woes of credit cards. It did not take long before I racked up more debt than I could pay off and quickly found myself in over my head.

Unsure of what to do, I reached out to a friend who had used a debt management program before and quickly signed up. In retrospect, I was lucky — the program I chose was a non-profit so it was an overall good experience, although there were definitely drawbacks. (programs that are run by for-profit enterprises are often predatory and can leave people worse off than before they started — to vet a potential credit counseling or debt management program, check to make sure they’re a member of the NFCC before you sign up for anything).

Here’s a quick review of what I learned along with the good, the bad and the ugly.

The Pros:

  1. Automatic discipline. While on the program, my credit was frozen, which prevented me from incurring additional debt. My monthly payments came out of my checking account automatically and I knew exactly how long it would take for me to get out of debt.
  2. Expert negotiators. I was young; I had no idea how to talk to a boy, much less talk to a creditor about lowering my debt. The counselor I worked with was trained to negotiate with creditors. She was able to get my interest rates cut in ½ and negotiated a payment plan that still allowed me to have a life while paying off my debts.
  3. Forced money management: To get on the program I had to work with my counselor to develop a spending plan. The spending plan helped me live within my means and manage my income.

Although the program did help me to pay off my debts there were drawbacks.

The Cons:

  1. Can affect your credit score. Everyone’s experience is different, but my creditors reported that I was on a debt management program to the credit agencies, so it showed up on my credit report. As a result, my credit score dropped (it eventually went back up once I completed the program). If you are thinking about buying a car or a home within the next two years, you may want to work with your creditors on your own to keep your score up.
  2. Fees. Although they were nominal, there were still fees to pay, which added to the total of what I had to pay overall to get out of debt. The fees can vary depending on your service provider, and are usually in the $25 to $50 per month range. (and if anyone tries to get you to pay several thousand up front, run away — that’s the wrong kind of program)
  3. Rigid terms. The terms you agree to are pretty set, with little wiggle room. Generally, if you miss even one payment, you can be kicked out of the program, depending on your creditor. If you have unsteady income, you may want to hold off on entering into a program until you are certain you can commit to the monthly payments.
  4. Only certain debts are covered. If you’re looking for help with your mortgage, car notes or other secured debts, a debt management plan won’t work — they really only cover unsecured debt such as credit cards or personal loans.

It’s important to understand that these programs are not a great fit for everyone. A debt repayment program renegotiates your repayment terms, but it doesn’t reduce the amount you owe. If you are looking for actual debt reduction, the program may not work. But if you’re ready to buckle down and do what it takes to be debt-free, then it can definitely make the timeline shorter and help give you the discipline you need.

 

 

 

What It’s Like to Work With a Credit Counselor

February 03, 2017

One of the things that our financial planning team talks about with people in distress about their debt level is the concept of using a non-profit credit counseling service to help them work their way out of debt. This usually happens after someone has had a few failed attempts at different “do it yourself” debt reduction strategies, like the “debt snowball” (pay off lowest balance first and when it’s gone, roll that payment into the next lowest balance debt and repeat till debt free) or “debt blaster” (pay off highest interest debt and then roll that payment into the next highest interest debt, etc.). After trying those and making very little progress, no progress or actually incurring more debt, people can be incredibly frustrated and feel like they need to take their efforts up a notch and get help from an external source.

When considering using an external source for help in getting out of debt, the number of options out there can be a bit daunting. There has also been enough fraud perpetrated by nefarious players who hold themselves out as debt reduction experts to make the landscape a little bit scary. Given that there is a great deal of uncertainty about how this vague concept of “credit counseling” actually works, I figured it would make sense to talk to a few people who have gone through the process to get their perspective.  Based on those conversations, here are some observations and things I learned that might be helpful for people who are ready to take that step to help their financial lives.

What did the process look like? The first step was a phone call with a counselor to talk about my situation and they pulled up a credit report. From there, we built a budget worksheet for me and my life. 

They contacted my credit card companies, got my rates reduced down to a really low interest rate and sent me a proposal that showed how much I’d pay each month and how many months I’d be paying. I’d pay them once per month and then they pay my credit card bill. If I sent in extra money, they’d apply that to each of my cards.

I’d get statements monthly and they charged a small fee ($25-$35 per month), which I wasn’t crazy about, but I paid it because I was seeing actual progress. While they are non-profit, they aren’t free and that was something I didn’t fully grasp at first. By the time I made my last payment, I had changed my spending habits, I was debt free and my credit score (after the initial drop) was higher than it had ever been. 

What surprised you? In order to qualify for the DMP, I had to complete a budget sheet and I had never done that. It helped them structure a plan that I could stick to with payments that I could actually handle. The closing of all the cards was also a surprise, but it makes sense. Once you’ve dug a hole and want to get out, it makes sense to put down the shovel.

What’s the best thing about using a credit counseling service? They helped me get out of debt and I had a schedule that made sense. Before entering into the DMP (debt management program), I was very scattered and would pay a bit extra on some cards but end up using others. It took 4 ½ years, but I went from over $30,000 in credit card debt to $0.

What’s the worst thing? Finding the right provider. My first shot at it, I used a company that called me. I ended up paying them for 6 months, they informed me to stop paying my credit card bills, and they never paid the bills. I feel like I got robbed, but I didn’t do my homework on them, so I take some of the responsibility for that.

Once I got to a non-profit credit counselor, I was able to get into a program that worked for me. I had to close every credit card except for one emergency card. My credit score dropped a lot when I stopped paying the credit cards and it took a while to recover, but once I got all the debt paid off, the initial pain was a distant memory so it probably wasn’t all that bad.

What warnings could you give to people considering working with a non-profit credit counselor? Be VERY careful with who you choose to work with! The non-profit credit counselors at debtadvice.org have a much better reputation than the for-profit wild wild west approach where you don’t know who is legit and who isn’t.

Don’t get into a DMP if you aren’t 100% committed to a multiyear process. If you’re looking for a magic pill that solves your debt issues overnight, this is probably not the right path for you. If you stick to the plan, you’ll get out of debt, but I’ve know people who start and get frustrated after 6 months and bail out of the program because they aren’t seeing results fast enough.

Like any tool out there in the financial world, the world of credit counseling isn’t for everyone. There are good things, not so great things and even the unexpected thing periodically. Do your homework, ask questions until you feel comfortable and get yourself out of debt whether you do it yourself, use a credit counselor, use a debt resolution company (future blog topic) or end up filing bankruptcy. Reducing and eliminating debt is a fantastic step toward getting yourself to a place where you’d call yourself financially secure.

 

Don’t Let Debt Destroy Your Marriage

December 19, 2014

Sometimes when I meet with someone to walk through their finances, I get the distinct impression that our conversation is going to have a significant impact on their life. I had one of those conversations recently with a couple who was very seriously considering separating and divorcing. One of the biggest factors in the stress and tension that is damaging their marriage is how they deal with money or…don’t deal with it.  Continue reading “Don’t Let Debt Destroy Your Marriage”

Don’t Make the Cash Call!

May 06, 2014

I recently spoke to a young woman on the phone who was in tears due to a loan she had taken out to help bail out her (then) boyfriend from almost getting his pickup truck repo’ed. The couple had seen a late night commercial on tv for CashCall, promising quick cash for any need. Of course, the boyfriend convinced her to put the loan in her name since she had better credit than he did. Can you just imagine where this story is going? Continue reading “Don’t Make the Cash Call!”

What To Know If You’re Considering Bankruptcy

August 16, 2012

In his blog post last week, Michael Smith wrote about a woman who was able to overcome tens of thousands of dollars in medical debt by giving up a variety of comforts, working a second job, and even having her friends host a local fund raiser on her behalf. When Michael last spoke to her, she was only 3 months away from paying off all the debt. This is a truly inspiring story about what can be achieved through sheer willpower and determination. Continue reading “What To Know If You’re Considering Bankruptcy”