These agencies have professional debt counselors who will analyze your finances, and possibly enroll you in a debt management plan.
Only unsecured debts can be included in one of these plans. Secured debts like mortgages and auto loans cannot be included in a debt management plan (DMP). Student loan debts, family support, alimony, back taxes, and child support also can’t be included.
The way a debt management plan works is that your debt counselor will serve as an intermediary between you and your lenders to negotiate reductions in your interest rates and to have any fees waived.
Assuming your lenders accept your DMP you’ll then make monthly payments to the consumer credit counseling agency. It will then disburse the money to your lenders.
The downside of a DMP is that your lenders will close all the credit card accounts in your plan, plus it generally takes four to five years to complete one.
If you choose DIY debt management
There’s no reason why you couldn’t manage your own debts. The biggest reason for this is no one knows your financial situation as well as you do.
The downside to DIY debt management is that you will need to have the time required to teach yourself about debt management. You will need access to key lending decision makers at credit agencies, the credit report bureaus and financial institutions. And you must be detail oriented.
If you believe you fit this profile, here are seven good tips for DIY debt management.
Be prepared to pay something up front
Your lenders may need as much as 50% of your debt up front though this is often negotiable. In fact, some won’t even begin negotiations until they get some money from you.
A cashier’s check or money order
If you pay a lender with a credit or debit card, it will have all your banking information, whether you want it to have it or not. The problem with this is that if it ends up suing you, it would be easy for the lender to get its money through your bank account. So, be sure to pay with a cashier’s check, money order or a wire transfer.
Be prepared to deal with an attorney
When you first contact a lender you’ll probably be dealing with a customer service representative in the bank’s or the credit card company’s collections department. But at some point, a lawyer may get involved – especially if you’re negotiating over a large debt.
Make sure the debt is reported as “paid in full”
A lender will usually agree to settle for less than your balance as this means they’ll at least get something. However, this generally means you’ll be required to make a lump sum payment in settlement. If you don’t insist the debt be reported to the three credit bureaus as “paid in full” (or similar wording), the debt may be reported as “settled for less than full amount due”, “settled for less than owed” or just “settlement”. This will damage your credit score and will stay in your credit reports for seven years. This will make it harder for you to get credit in the future and when you do it will have a high interest rate.
Always be realistic
If your customer service representative is a tough negotiator you might be tempted to agree to a deal that you can’t really afford. Be honest and realistic. Never agree to a debt management plan that you can’t afford. Tell the other party what you can afford to pay and let her or him know that if they demand more, you will have to file for bankruptcy, where they would get nothing at all.
You may need to get your own attorney
If negotiations with the lender get totally bogged down and especially if you’re dealing with an attorney, the lawsuits can start to fly. If this is the case, you’d be smart to get your own attorney, and if the debt is large enough, you might want to get your attorney up to speed and ready to go right from the start.
Find out how far the lender will go
Finally, it’s important to learn how far a lender will go. For example, if it offers to waive your payments for three months, ask for four. If it offers to settle your debt for 70% of what you owe, ask for 50%. You should always ask for more than you expect to get so you will have negotiating room. And whatever you agree to make sure it will fit comfortably within your personal budget.