The biggest obstacle to someone with a crushing debt burden is a lack of knowledge of how to get their arms fully around the problem, and know how to go about making it right. They do not know fully what options are available to them, and if they do, they are unsure as to what the right first step for them is.
I know, because in June of 2010, I was in that exact situation.
We knew bankruptcy was an option. While we didn’t know much about the process, we did know that it would affect our credit, and our financial options for years to come. We decided to search for alternative solutions. We hit the internet, and found two debt relief options that we hadn’t heard of before.
Debt Management Programs
Debt management programs, also called debt consolidation programs or credit counseling, is a way for people to pay off their unsecured debt using a third party debt relief company. A debt management program (DMP) works like this:
- Customer enrolls in a DMP with a debt relief company providing them with information regarding the accounts to include in the program.
- The debt relief provider negotiates a monthly payment and reduced interest rate with the creditor that results in elimination of the debt in 3-5 years.
- The customer makes a single payment to the debt relief provider, including a monthly administration fee based upon the amount of debt enrolled in the program. This fee usually ranges between $10 and $50 per month. The debt relief provider then disperses the agreed upon payment amounts to each individual creditor.
- In exchange for a fixed monthly payment and reduced interest rate, creditors close the accounts so no additional debt can be accumulated. While the act of enrolling in a debt management program does not affect your credit score, the closing of accounts will affect your debt to income ratio, as well as your credit history likely causing your credit score to dip in the beginning. However, by making consistent payments to the DMP, as well as to other financial commitments, a customer’s credit score usually rebounds quickly.
DMPs generally work well for people who are current with their payments, but just cannot make any progress on the balances due to high interest rates. By closing the accounts to avoid future debt, and having negotiated monthly payment and lowered interest rate, DMP customers can repay their unsecured debt within 3-5 years.
For more information about how a debt management program works, check out this article.
Debt Settlement Programs
A Debt Settlement Program (DSP) involves legal representation, and is aimed for people whose financial situation is a little more dire, but still would like to try to avoid bankruptcy. People who enroll in a DSP go through the following process:
- Customers stop paying the creditors enrolled in the program
- Customers make monthly payments to the debt relief provider to fund an escrow account.
- Over time, the customer’s accounts become severely delinquent. The lawyer assigned to the account will then reach out to creditors to negotiate settlement of the account for less than the full amount.
- The agreed upon settlement is paid from the escrow account.
Debt settlement will have a negative effect to a customer’s credit score since payments to the creditors are halted. Customers may also begin to receive collection calls from the creditor, at which time they are to inform the caller of the legal representation now handling the account. By law, this should stop the phone calls. There may also be tax implications for the amount of debt forgiven through a DSP.
DSPs are generally used by people who cannot meet all their monthly financial commitments and need to lower their monthly payments but want to avoid bankruptcy. By having the debt relief provider negotiate a settlement of less than the amount owed, customers can make progress on getting creditors off their backs in 3-5 years and then focus on rebuilding their financial future.
Click here for more information on how a Debt Settlement Program Works. < >
On July 1st, 2010, my wife and I enrolled in a debt management company. Within a month, all thirteen of our creditors with accounts totally over $109,000 of credit card debt were on board with a negotiated payment and interest rate. We made 55 payments of $2489, with the final payment being at the end of January of this year.
Up until a week before we enrolled in our DMP, we hadn’t heard of debt relief providers, debt management programs or debt settlement programs. There are countless people in the same position we were in then; in debt and looking for a way out, but just not sure what the first step is.
The first step is to educate yourself on all of your options, including debt management programs, debt settlement programs, do it yourself techniques and even bankruptcy. Once you fully understand all your options, only then can you make the right decision for you.
Are you looking to get out of debt but don’t know where to start? Have you looked into a debt management program, or a debt settlement program?
Travis Pizel blogs at Enemy Of Debt where he candidly shares his family’s experiences, struggles and successes as they fight their way out of debt. As a father and husband he provides a unique perspective on balancing debt, finances, and family.