Debt Managers – 11 Facts You Should Have Known Earlier!

At the best of times, being in debt is no fun (especially when you have more than the average). At the worst of them, debt can feel like a monster standing over you, growing slowly larger and stronger each day.

Whether it’s your credit cards, student loans, uninformed investments, or simply poor money management, there are many reasons you might be in debt.

At times like this, it can be very tempting to avail the services of debt managers.

Well, a debt management program can help you. But that help comes at a cost. And is that cost worth bearing to get out of debt?

Before deciding, consider what benefits and drawbacks debt management programs have that you might still be unaware of. Find out below.

What Is a Debt Management Plan?

If you choose to enter a debt management plan, you will be working with a credit counsellor who a credit counselling agency employs.

The agency is typically licensed to make payments on your behalf. To this end, the agency will assign you a credit counsellor. Credit counsellors are tasked with working with you closely to help you figure out a payment plan to settle balances with all your creditors over a specified, limited time period.

The plan will include a payment plan based usually on how much debt you have and typically one that allows you to make one monthly payment towards all of your debts.

Your credit counsellor will draw up a payment schedule for you, which will specify a time period, usually around 5 years, in the course of which your creditors will be paid off using monthly payments.

Generally, you’ll have to deposit a certain amount of money to the debt managing company, which they will then use to make monthly payments and help you gradually eliminate your debt(s).

For part of your debt management plan (DMP), your creditors might also agree to a lowered interest rate at this stage, and some might even eliminate interest entirely.

Some might waive fees here and there. However, this is not always a given and depends greatly on the reputation of the credit counselling agency you choose, along with your record and financial situation.

Another one of the debt solutions some people look to is traditional debt consolidation. In that process, however, you’ll be required to take out a loan to pay out the existing debts that you already have.

Considering this, a DMP might sound like a lucrative debt solution. However, credit counselling should not be your first resort to get out of debt.

While these plans might help you get debt relief, they’re not for everyone. Here’s what you need to consider about debt management plans before considering a proposal.

11 Facts About Debt Management Programs

Before you decide whether to take the help of a credit counselling agency, consider the following factors.

1. A Debt Management Plan is Not a Loan

Unlike traditional debt consolidation, which involves taking out a new loan to pay off existing ones, you won’t be getting into further debt with a debt management plan.

Instead, you’ll be agreeing to a long-term debt repayment plan to repay your debts using one monthly payment. This is an option that can be used to avoid bankruptcy.

Furthermore, many debt management plans help you be excused from certain extra fees and charges and try to settle on a lowered interest rate (this usually works with unsecured debt).

We usually recommend a tiered approach to deal with debt. One where you work your way through all options ranging from the minimally invasive, like traditional debt consolidation, to more invasive options like credit counselling, consumer proposals, and as a last resort bankruptcy.

2. You Make Just One Monthly Payment

It is perhaps one of the most relieving benefits of entering a debt management program.

A debt management company will help consolidate all of your debt payments into one affordable monthly payment, which the agency will forward to your creditors. With each payment towards debt settlement, you’ll be closer to debt relief.

This means that once you allow a credit counselling company to hand the reins of your debt payments over to a credit counsellor, you’ll have to worry a lot less in regards to your overall budget.

In saying this, there are other options available to obtain a single monthly payment which usually yields better results than a DMP such as a consumer proposal.

3. It Is Not a Free Service

Many companies and agencies providing debt management program services are non-profit organizations whose only goal is to help you with debt settlement, but this doesn’t mean they are free

They sometimes claim to provide a viable, free, solution and help you eliminate debt, but they will usually charge you a monthly fee for their debt settlement services. This fee usually ranges between 5 and 15% of your overall debt. So, if you have a lot of debt, credit counselling fees can be quite expensive.

If you’re in dire, debilitating debt, this might seem like an extra burden to bear on the way to being debt free. However, reduced rates and fees might make up for this if your total debt is low.

This brings us to our next point:

4. It Can Help You Save Money Each Month

One of the most lucrative services offered by a debt management plan is lowering high interest rates , which can be a decent debt solution all on its own.

And even if you can’t get a lower interest or have your fees waived, you’ll still be able to benefit from the ease of having to make only one monthly payment for all of your debts.

Be warned though, while a single payment does make dealing with debt logistically easier if the new payment is equal to the total of the old payments you may still face challenges.

Your debt management program might also free up enough cash flow to actually help you start saving cash every month.

This means you’ll be better able to manage your budget as you advance. So in many ways, you get multiple solutions at once.

However…

5. Your Credit Score May Drop

The obvious benefit of having a DMP as a debt solution is that you can become debt free using a single monthly payments that fits your budget. The unfortunate cost of a DMP is having a poor credit report.

If you are in a severe debt crisis, a lowered credit score is one possible pitfall of getting into a debt management plan.

While renegotiating your debt payments, your credit counsellor can and most likely will make alterations to the payment schedule. This is because not every creditor will agree to the plan initially proposed by your credit counsellor.

The consequence of filing a DMP is that your credit will be negatively affected.

And of course, once you pay back the whole of your DMP and your balance with a creditor has been cleared, they will close the account. This will allow you to rebuild, but usually, only once the entire plan has been paid off.

Although this is a relief, it also means that any good history you have with them will be damaged. But you’ll have to accept this as an unfortunate part of seeking debt relief.

6. You Won’t Be Able to Open New Lines of Credit

It’s pretty easy to guess that, despite the somewhat easy solution it provides, being enrolled in a debt management program has the effect of lowering your credibility as a debtor.

It essentially shows that you can’t borrow money without becoming financially unstable.

As such, you’ll be restricted from opening new lines of credit. Otherwise, you’ll be endangering the privileges offered to you by the debt management company. In addition, you’ll be even farther away from debt relief.

Although this can be limiting, in the long run, it’s also setting the stage for a solution to poor or previously bad money management.

This fact is true among most other invasive debt options as well.

Not to mention…

7. Entering a Debt Management Program Might Actually Increase Your Credit Score

We know this sounds contradictory. And almost everywhere you look, you’ll hear that debt management programs will lower your credit score. But, of course, that makes sense: why should you be allowed to take out more loans when you can’t pay off your existing ones?

That said, in some cases, the lower your credibility, the more space there is for your credit score to rise. Because when you’ve fallen behind by racking up one too many late credit payments, you can—ironically—only go up.

This is because, as time passes and you pay off more and more of your loans dealt through your debt management plan, your credit utilization goes down and the constant negative reporting from your creditors may stop.

But remember this: whether your credit score takes a dive or actually increases, the important thing is that with a DMP and any debt solution program is you will have taken a decision to make your way to being debt free.

And ultimately, you can’t achieve a sustained rise in your credit score unless you pay back all your debts and your incriminating accounts have all been closed.

8. Not All Credit Counseling Agencies Are Created Equal

You can probably already guess by now that no credit counselling agency should be trusted blindly. Especially given that it’s your financial situation in the balance, you have to be careful who you choose to help you pay back your debts.

You have a lot of agencies to choose from to get debt help. As such, you can try to find a non profit credit counseling company that has made it through a comprehensive and extensive certification program in providing debt relief, or better yet, an unbiased debt consolidation company that can assist you in understanding all of your options, not just credit counselling.

Beyond this, look for signs of good organization in the company that you choose to handle your debt management plan.

Look into their record; do they have a history? Do they have good reviews? Do you feel that they are doing their best to offer you the support and information that is crucial for providing debt help? Trust your gut. If something feels off, it probably is.

9. You’ll Have to Say Goodbye to Your Credit Cards

Outside of personal loans and unsecured debt here and there, most people require debt management services to get out of credit card debt.

As such, entering a debt management plan requires you to close all of your existing credit cards, with the condition that you won’t be able to open any new credit card account until you’re clear of all of your debts.

We understand that this can be difficult, especially if you’re accustomed to using your credit cards for everything. But it’s a cautionary measure to prevent you from falling into even deeper credit card debt.

The good news is learning to live without a credit card is usually one of the best habits an individual can learn. In fact, it has been shown that using credit cards can increase spending by as much as 100%.

10. Successful Completion Might Take up to Five Years

Something that might dissuade you from getting into a DMP is the long amount of time it sometimes takes to pay off all your creditors.

The duration of the debt repayment plan drawn up for you by the credit counsellor usually falls anywhere between 2 and 5 years. But, of course, the higher your debt, the longer this time period is likely to be.

However, realistically, this is a necessary trade-off when you’re in a lot of debt and attempting to avoid bankruptcy.

Simply put, this is the present price you must pay for the loans taken out by the past you.

Think of it this way: by the end of the program, you will have repaid all of your debts, and that’s the kind of positive development that will allow you to rebuild your credit.

11. You Might be Able to Get Debt Relief on Your Own

Finally, the most important thing you need to know is that a debt management plan should be the last of your chosen debt relief options as it can be one of the most expensive debt relief options. There are other paths you may take to get out of debt.

It is because, essentially, what these agencies do is contact your creditors and negotiate payment alternatives, and perhaps ask them to consider letting you off with reduced fees and interests.

In fact, the tasks associated with this debt relief option can sometimes be achieved by you alone.

It might initially seem daunting to talk to creditors but remember that they want what you want: for your balance to be cleared. You might find them to be more cooperative than expected.

Start by making a list of all the creditors you have and what you owe them, including interest rates and fees. Next, identify how much you’ll have to pay per month.

Then, take a good look at your established monthly expenses to determine whether some of them can be redirected to debt settlement.

Then attempt to negotiate with your creditors. Additionally, you might want to shut down all your credit card accounts.

Final Words

There are many possible steps you can take to free yourself of debt. A debt management program is only one of many options available. Which one you choose is, ultimately, entirely up to you.

Take a good look at your financial situation and try to gauge as realistically as possible whether you genuinely need help. We suggest reaching out for help sooner rather than later and we’d be more than happy to help you figure out your best option with a free consultation.

And remember, if you are considering any debt relief option like declaring bankruptcy, debt consolidation, or a consumer proposal to pay off your debt we highly recommend speaking with a professional. These options get very complicated, very quickly depending on your circumstances.

Trust your gut. You’ve got this!

This article was written by David Moffatt, a Debt Relief Expert. He has helped assist in creating plans that have helped save Nova Scotia residents over $30 million dollars of consumer and tax debt since 2015. We believe that no consumer should have to struggle with the stress of overwhelming debt. Our debt restructuring strategies can help you cut your debt by up to 80%.

If you are struggling with debt please reach out. It hurts to continue to suffer financially. Halifax Debt Freedom services Halifax, Dartmouth, Bedford, Sackville the entirety of HRM, and all of Nova Scotia.