Debt and the Man: How A Good Plan Can Get You Out of Debt

Debt and the Man: How A Good Plan Can Get You Out of Debt

Ask anybody drowning in credit card and other forms of debt about his/her American dream, you will discover that  keeping their head above water and making their next payment on time is high on the wish list. The fundamental fact here is that if you have too much debt and is struggling to make payments each month, you should remember you are not alone. A lot of people have been there before too – and they survived.  And like you, many are still there, unfortunately. The bottom line here is clear: When it comes to keeping your head above water and getting out of  debt completely, the gold standard is to realize that no matter how bad it is there is a way out because you do have options.

Some of these options include debt consolidation, debt settlement, and even bankruptcy. However, before choosing any of these options, it is best to consider one important option first: a debt management plan(DMP).

Plan, But Also Negotiate

With a DMP you can negotiate, arrange and even implement an easy and affordable debt repayment plan through a consumer credit counseling service or a debt management company. A DMP typically takes 4-5 years to pay off, depending on how much debt you carry. The DMP option is very simple to implement: your debt service provider(that is, the consumer credit counseling service or a debt management company) works directly with each of your creditors on your behalf to cut your monthly payments to an amount you can realistically afford each month,  lower your interest rates and stops any over-limit or late fees. So, once the repayment terms are negotiated, you will be required to do only one thing each month: make one affordable payment each month to the consumer credit counseling service or the debt management company. They will then distribute the fund to your creditors for you(Templeton, 2013).  You should know one important thing though: the , the consumer credit counseling service or a debt management company will charge a fee to manage the DMP and disperse the fund each month. The typical amount charge is usually$10- $20 per month, but this fee varies from one DMP  provider to the other.

Choose A Good and Reliable DMP Service Provider

It’s best to choose a nonprofit consumer credit counseling service that is a member of the National Foundation for Credit Counseling(NFCC). I recommend this option for three reasons. First, knowing that the chosen nonprofit consumer credit counseling service is a member of NFCC – the accreditation agency and watchdog for the consumer credit counseling service industry – will give you a piece of mind. Second, unlike a debt management company,  a nonprofit credit counseling service have no ulterior motives other than helping you get out of debt. Thus for them, it’s not about them making a profit  from your situation – it’s to make you debt-free. Third, I am very skeptical about the operations of the debt management companies: They often advertise that they can help you pay off your debts for “pennies on the dollar.” However, many of them have drawn intense criticisms by both regulators and consumer advocates  for not only failing to help the consumers but also for charging high fees that drive consumers deeper into debt.

My advice: Caveat emptor!

The Catch

The benefits of DMP is, to some extent, blunted by the fact that you won’t be allowed to open any new credit cards or take out any new loans while you are in DMP program. As a matter of fact, because your credit report will tell them that you are in a DMP, a lender or a car issuer will decline your application anyway, if you do apply. You shouldn’t let this border you because it’s part of the DMP agreement. You will become eligible to apply for credit as soon as you get out of debt and is back on track.

The other downside of DMP is clear: Your creditors will most likely close the accounts once your debts are paid. When they do this, you will lose the credit history on them because they will eventually fall off your credit reports. This will make both your credit and credit score to suffer – but only if you never open another credit card or line of credit again. My advice: Once the debt is paid, get one or two credit cards for your credit scores. It is more healthy that way if you manages them wisely. Good credit history is very important too.

The Good News

On the positive side, you will begin seeing offers for credit once you are out of the DMP plan and have paid off all your debt – the oddity is that some of the offers are even from the same company you just finished paying off(to sign back up and open a new credit card account, albeit at a higher interest rate). Be smart! Of course, you would have learned good lessons about how to better manage credit cards after five years of repaying and digging yourself  out –lessons that would prevent you from falling into the same trap again.

References

Templeton, D.(2013): How A Plan Can Get You Out of Debt. MSN. Retrieved May 20, 2013 from http://money.msn.com/how-to-budget/how-a-plan-can-get-you-out-of-debt