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Debt Management…Continued 11-16-2009
I would like to clarify a few things that were below in my “Weekly Credit Tip” from and I highlighted the negative impact that Debt Management/Counseling COULD have on a person’s credit. What I would like to clarify is the difference between Debt Counseling, Debt Management, Debt Settlement and Debt Consolidation…
Debt Counseling consists of meeting with a qualified representative of a reputable company to examine a person’s financials. This includes assessing income and expenses and developing a customized budget to achieve financial goals. This will have absolutely no negative impact on credit scores whatsoever, and the result of developing a budget and paying off debt can actually help to improve credit over time.
Debt Management consists of working with a qualified representative to enter into a DMP (Debt Management Program). This is a debt assistance program in which a credit counseling agency helps to pay off debt through a payment plan negotiated with your creditors. This type of program consists of working with creditors to reduce interest rates and eliminate late fees or over the limit fees—resulting in more money going towards the principal. This MAY have a negative impact on scores, depending on how the creditor decides to report the DMP to the credit reporting agencies. In some cases, the account included in the DMP will report a narrative stating: “Account payments managed by Debt Counseling Service” or “Managed by Credit Counseling Service”. This CAN have a negative impact on scores.
Debt Settlement consists of working with a company that will assess your debt and income and design a payment plan to settle the amounts owed—usually only with credit cards. The company works with creditors to negotiate a lesser outstanding balance due on the account. This type of company receives the payment and immediately takes their monthly fee. Then in order to gain leverage with the creditors, the debt settlement company stops making payments to the creditors. The theory behind this is that if you get the creditors desperate enough for a payment, they will be more open to accepting less than what is actually owed. This WILL have a negative impact on credit because of a combination of the late payments and the creditor reporting the account as “settled” vs. “paid as agreed”.
Debt Consolidation refers to working with a “lender” to borrow money to pay off individual debt, resulting in one monthly payment. The consolidation loan can then be paid in smaller monthly payments. This has the POTENTIAL of damaging credit scores in the short-term depending on the type of debt being consolidated, but can help build positive credit over time.
The reason that I wanted to clarify my “Weekly Credit Tip”, is because all of these terms seem to be used interchangeably. Some companies that focus on Debt Settlement advertise themselves as Debt Management companies or Debt Counselors—and some Debt Management companies offer debt settlement as part of the Debt Management Program. Because of this, it is very important to research the company to determine what they actually do. It is also important that you understand what the program you enter into consists of. Make sure that a company is reputable by checking with the National Foundation for Credit Counseling. Bottom line is that these companies help people get out of debt and build a stronger financial future. It is our job as consumers to read the “fine print” and decide what the best choice is.
Kevin D. Weier
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Debt Management - 9/6/2009
Recently, I have come in contact with a number of people who are working with Debt Management companies. For those people that think they are too far in debt to do anything else to better their situation, this may be a reasonable solution. A few words of caution though…
It seems to me that all or at least most of these companies have the same strategy. They bring clients on and work on their behalf with their creditors. They will devise a plan to pay off your bills within a certain amount of time and get you out of debt. The client begins paying an amount directly to the debt management company which is used to put toward their current debt. Here’s where things get interesting and is seldom known by the client unless they read the “fine print”. The debt management company receives the payment and immediately takes their monthly fee. Then in order to gain leverage with the creditors, the debt management company stops making payments to the creditors. The theory behind this is that if you get the creditors desperate enough for a payment, they will be more open to accepting less than what is actually owed.
The positive side to this method is it can save people up to half of the amount they owe to the creditors and will get them out of debt in usually 2-3 years.
The negative side is two-fold. First, by not paying your monthly obligations, the creditors will mark you late on your credit reports. Second, there will be a notation added to the account as “Settlement Accepted” or “Settled for Less than Full Balance”. This will have an extremely negative effect on your credit scores, similar to a bankruptcy in most cases.
Credit Coach can help! The benefit that people gain from our credit restoration and education services will help them build positive credit scores and put them into a stronger financial position. Contact me to find out more information.
Kevin D. Weier
