If you are bogged down with credit card debt and it’s taking forever to pay back your creditors, you might feel that bankruptcy is your only alternative. But don’t quickly schedule a free consultation with a bankruptcy attorney just yet; bankruptcy is not the only answer. In fact, many people in similar situations have successfully conquered their high credit card balances with the help of a debt management program.
A debt management plan is a program that can help you get out of debt. If you’re in over your head and can barely keep up with your minimum debt payments, a debt management program can get your finances back on track. This program will not eliminate your balances, but with the help of a credit counselor, you can receive a new repayment plan that fits comfortably within your budget.
Program specifics vary by company, however, most debt management programs will consolidate your debts into one loan. Rather than send a payment to each of your creditors, you send one monthly payment to the debt management company for a simplified payment process and easier way to manage your debt.
Before debt management companies can consolidate credit card debt and establish a new repayment plan, they need the cooperation of creditors.
If you decide to proceed with a debt management plan, a credit counselor from the company will contact your creditors. Debt management companies have relationships with various creditors, and they know how to negotiate on your behalf. The company will ask your creditors to eliminate your interest rates, settle the balance for less than you owe or eliminate late fees and other penalties.
Successfully negotiating better terms translates into substantial savings for you. A debt repayment plan often results in lower monthly payments, and since all of your payments are applied to your principal balance, you can pay off the debt faster. The length of a debt management program varies depending on how much you owe. However, debt management companies typically develop a five to seven year repayment plan.
Debt management programs offer more than debt consolidation. Several debt management services also provide financial and credit education. You will work directly with a credit counselor and receive advice on debt management and budgeting.
Unfortunately, some people do not learn from past mistakes. And after successfully completing a debt management plan, they resume bad habits and incur additional debt. Basic education on credit, savings, budgeting and interest rates can help you make wise financial choices in the future.
Additionally, working with a debt management company can end non-stop collection calls and lawsuit threats. Your credit counselor will not only contact and negotiate with your original creditors, but also collection agencies. Once there is a plan in place to pay off your debt, debt collectors will back off .
The effects of a debt management plan on your credit score depends on several factors. If you sign up with a debt management service and the company negotiates a lower interest rate on your credit card, this action will not hurt your credit score. However, credit scores can take a dip when debt management services settle your balance for less than you owe.
Plus, your original creditors may add a note on your credit report that says “third-party assistance.” This indicates your participation in a debt management plan. The fact that you couldn’t manage your own debt looks bad on your credit report, and this can prevent future loan and credit card approvals.