Being deeply in debt is no fun at all. You’re probably receiving calls from your lenders, or worse, yet from debt collectors. You may be lying awake nights worrying, and even suffering health problems caused by the stress of dealing with your debts.
One solution that’s helped many people is consumer credit counseling. If you’re lucky, there’s a good, non-profit consumer credit counseling agency near where you live. (Note: To see if one is near you, go to the National Foundation for Credit Counseling’s website and click the link Find An NFCC Agency.). Otherwise, you may have to find an online source. Just make sure it’s a non-profit, has been reviewed by certified credit counselors and offers its services either free or at low cost.
What to expect from your credit counselor
A credit counselor will first review your overall financial picture. He or she may then help you prepare a budget designed to get your debts under control and paid off. If it turns out a budget isn’t the answer, you will be offered a debt management plan.
Don’t be fooled by the term debt management plan (DMP). Its goal isn’t just to help you manage your debt, it’s to get it paid off.
The way it works is that your credit counselor negotiates with your lenders to get your interest rates reduced or frozen and any fees waived so that your monthly payments will be more manageable. Then, instead of paying your creditors you pay the credit counseling agency each month until all of your debts have been paid off. This service may cost you $25 to $35 a month, and the process will take four to five years depending on the size of your debt.
Understand the downsides
It’s important to know the downsides of a DMP before choosing this option. The biggest of these is that once your lenders learn you are in a debt management plan, they will most likely close your accounts. You could be left with no credit cards save the one you might be allowed to keep to use in the event of an emergency.
You’ve already read the second biggest downside, which is the amount of time it takes to complete a DMP. Five years is a long time and things can change, including your financial situation. Many people who start a DMP never complete theirs for this reason.
Make sure you can afford the monthly payment
Once your credit counselor creates your DMP, take a hard look at the monthly payment required. It needs to be something you can easily afford because if you can’t, you’re doomed to fail. Be honest with your counselor. If you believe you would have a hard time making the suggested monthly payment, tell your counselor this. She or he should be able to redo your DMP to get to a monthly payment that would be easier for you to make.
Get everything in writing
If you choose a DMP, make sure you get it in writing. Don’t rely on any verbal promises. The credit counseling agency should provide you with a contract containing all the pertinent information including your monthly payment, the fees, and how long it will take to complete the plan.
Continue making your payments
You need to continue making payments until your lenders have accepted your credit counselor’s proposal. If you can’t make all of your payments, try to at least pay something on them. If this is impossible, call your lenders and let them know you’ve enrolled in a DMP. Most will work with you. Keep paying as much as you can until you’re certain they’ve accepted your DMP. The critical thing here is to communicate with your lenders.
When to make your first monthly payment
Don’t make your first monthly payment to the credit counseling agency until you’re sure your lenders have accepted your DMP. Don’t take your credit counseling agency’s word for this. Contact each of your lenders to make sure they’ve accepted your DMP and verify they understand its terms.
Continue paying your other bills
All of your debts won’t be included in your DMP. For example, it won’t include secured debts like your mortgage or automobile loan, and your utilities. It’s important to know which debts are included in your DMP and which aren’t. Continue paying on the ones that aren’t. You should find it easier to make these payments now that you have just the one affordable monthly payment on your other debts.
Make sure your payments were received
Your credit counseling agency should provide you with a statement each month. It’s almost certain that the statement will be accurate but you should check with your creditors to ensure that they have received the agreed-upon payments. This is especially important in the first few months. In fact, you may want to call them instead of waiting for monthly statements from each of them.
If you’re truly committed to getting out of debt, a debt management plan can be a good solution. Just make sure you understand both the pluses and minuses before signing up for one. If you choose to go this route, make all of your payments and on time. Fail to do this, and you’ll end up in more trouble than before you signed up for the plan.