Is a Debt Plan Management Right For You?
By Sylvia Burleigh
From around the web we’ve heard from financial experts on debt management plans; some agencies, such as CreditCard.com, fully endorse debt management plans or DPMs while others not so much. Debt management plans, offered by consumer credit counseling agencies, help consumers with devising a workable, long-term plan for repayment of debt to creditors. As recently as April 2009, Credit Card.com brought attention to 10 major, US credit issuers that responded to a call to action from the NFCC (National Foundation for Credit Counseling) which advocated for lower costs to consumers interested in DPMs. The NFCC, a nonprofit consumer credit counseling organization, hopes it will encourage families with severe debt to take advantage of DPM programs. These changes will lower minimum payments and develop budgets that encourage savings for that unexpected bill. This “new adjustment” approved by major creditors will allow for some flexibility with budgets while keeping consumers on track.
Debt Plan Management by the Numbers
Even with this recent repayment restructure, not everyone agrees that DPMs work for every case. Consider the recent article by Liz Pulliam Weston, Why Credit Counseling Often Fails. Within the article some cold hard facts were revealed by the NFCC, 55% of those in DPMs either completed their payments or dropped out of the plan because they’ve reached a point of solvency to resume payments on their own, leaving a dropout rate of 45%. While these statistics seem dismal, it also helps to consider that in 2008, some 3.2 million people contacted the agency for help. Of those who contacted the NFCC, one-third were able to handle their debt after one counseling session and on that note 1 million people took advantage of services provided by the NFCC.
Still others, such as Steven Rhodes of Getoutofdebt.com, who once managed a credit counseling agency, suggests that low completion rates are a direct result of debt management plans that are tailored to the needs of the creditor rather than based on what consumers can afford. To further muddy the waters, Mr. Rhodes states that through all of his research and interviews the one lingering issue still remains that…
”There is simply no open forum or discussion on all debt resolution services and completion or success rates for consumers to make fully informed and educated decisions.”
However, if you’re considering a debt management plan to assist you with severe debt, you’ll need to consider all your options before signing up. The purpose of this article is not to permanently rule out debt management plans as a viable route to solvency, but rather make you aware of all your options.
What Other Options Exist
- Talk to an accredited credit counselor. As previously mentioned, credit counselors can assist anyone needing advice on help with debt, whether your credit is good or not. For more information about credit counseling agencies, see What you need to know When Selecting a Credit Counselor.
- Talk directly to your creditors about a repayment plan. Consider talking to your creditors directly about working out a repayment plan. While credit counselors can lobby for the removal of fees, a reduction in interest rate or an adjustment in payments against your debt, you are most likely your best advocate. The key is not to wait too long to ask for help. Both credit issuers and credit counselors advise those who have medical emergencies or a recent job loss to contact creditors or borrowers before a situation becomes overwhelming.
- Bankruptcy as a possible solution. Bankruptcy is often a last resort and its consideration should be weighed very carefully before filing. One major consideration is that a Chapter 7 remains on your credit reports for seven to 10 years, and a Chapter 13 remains on your credit report for seven years. The Federal Trade Commission or FTC recommends that pre-bankruptcy credit counseling take place before making any final decisions. If you still feel bankruptcy is necessary to a better financial future, hire a reputable bankruptcy attorney. Further resources for bankruptcy can be found at the American Bankruptcy Institute or the National Association of Consumer Bankruptcy Attorney .
- Is the do-it-yourself-plan an option? If possible consider paying down your debt yourself. Personal finance experts recommend tracking your repayment by listing all your debts starting with the debt that has the highest interest rate. Pay as much as you can toward the balance with the highest rate, while paying the minimum on the other debts. Once it’s paid in full, focus on paying the next debt with the highest rate and continue until you’re debt-free.
- How do I know when I’m over my head? You may need debt assistance if you’re struggling to meet minimum payments, or you’ve recently lost your job and your withdrawing money from your retirement accounts, or you find yourself borrowing from one credit card to pay another. All of these are signs that you need to consider debt assistance.
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