We ask what costs are involved in setting up a debt management plan and whether there are alternatives to paying these costs.
If you are thinking about using a debt management plan (DMP) to solve your debt problem then an important factor to consider is what costs will be involved.
If you want a debt management company to provide a DMP service for you they will normally ask you to pay two types of costs.
There will be an initial cost to set up the debt management plan for you and then you will have to pay an ongoing cost if you want the debt management company to run your DMP for you.
Most debt management companies will make an initial set up charge for putting your debt management plan in place.
This initial charge will cover preparing your income and expenditure statement with you and carrying out the negotiations with your creditors to reduce your monthly payments.
The cost of setting up your debt management plan will normally be equal to the first one or two payments that you pay into the plan.
In other words, the first one or two payments you make will not go to your creditors. They will be kept by the debt management company for the set up work that they do.
Once your debt management plan is up and running the debt management company will then start to charge and ongoing management fee.
The cost of this management fee will normally be around 17% of the amount you pay into your plan each month.
The fee is charged to cover the cost of managing the monthly payments to each of your creditors and any ongoing negotiations that are required to ensure your creditors freeze their interest charges.
The DMP management fee will be automatically deducted from the payment you make into your plan each month.
You need to understand that by paying this fee, not all of the money you pay into your debt management plan each month will go to your creditors and this will add to the overall time it take to repay your debt.
If you are concerned about the costs involved with setting up and running a debt management plan, there are some cost free alternatives you could consider.
The first thing you could look at is the possibility of setting up and managing a DMP yourself.
There is nothing to stop you negotiating a debt management plan with your creditors yourself and then managing the ongoing payments.
Alternatively you could pay a debt management company to set up the plan and then manage the ongoing payments yourself thus saving the ongoing management fee.
If you do not want to set up and manage your debt management plan yourself, you could consider using a free service. There are one or two organisations that will set up and manage a debt management plan for you for free
Many people decide to pay a debt management company to set up a DMP on their behalf rather than doing it themselves or using a free service. There are various different reasons for this.
You may feel that you do not have the time or the confidence to negotiate with your creditors yourself.
Using a reputable debt management company means you can be sure that any objections raised by your creditors will be dealt with and the company will do their best to get interest and charges stopped.
You may also want to be confident that the company you are working with focuses on your interests.
If you use a free debt management service there is always a question as to whether the company is working in your best interests as ultimately the DMP service is paid for by the creditors themselves.
As with all debt management solutions, the cost of a DMP is an important thing to think about when deciding if it is the right thing for you.
The key thing is to understand exactly what you will be charged and why. Then you can make a sensible decision about whether the DMP is the most suitable option for you.
James Falla is a debt management solutions expert and author. He has fourteen years of experience of implementing debt management plans for people who are struggling with personal debt.
In 2004 James co founded Thomas Charles a specialist debt management solutions company where he personally helped hundreds of clients implement debt management plans. James is now the managing director of and senior debt advisor for Wilmott Turner Financial Services which operates debt solution websites such as www.beatmydebt.com.
Watch the video related to debt management
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Depends on what your credit score is now.
If your credit is still bad you may have to pay a larger security deposit.
It shouldn't. After all, the Credit Agency's WANT You- to pay your Debts off…-So they're not going to penalize you for DOING something to make that Happen…
Yes, participating in a debt management plan through a credit counseling agency will hurt your credit, though likely not as much as some other alternatives. However, a debt management plan will take longer, cost you much more money, and may not significantly reduce your monthly payments or balances (but interest rates will probably be reduced). Generally, you'll end up repaying 100% of what you owe, plus interest, but at a lower rate.
Whether it's a good idea for you will depend largely on how much debt you have, your ability to afford the monthly payments, and how important your credit score is to you (and how much more you're willing to pay to try to maintain it). Let me give you some examples:
Borrower #1 owes just $5,000 in unsecured debt. A debt management plan may be a good solution if he can afford the payments. He'll end up paying back the full $5,000 balance plus interest, plus fees to the credit counselor- but his credit should not sustain as much damage as had a debt settlement company withheld payments from his creditors for months or years, hoping to force a settlement. In this borrower's case, a debt settlement may have only reduced the balance by $1,000 – $3,000 dollars, which is a small consolation for having his credit score trashed. Plus, the fees to the debt settlement company would likely eat up a good portion of those savings. But let's look at a different example…
Borrower #2 owes $70,000 in unsecured debt. Let's say the DMP (debt management plan) is able to reduce her interest rate from 19.9% to just 5%. On a 60-month plan, her monthly payment (not including credit counseling fees) would be $1,321. That comes to a total of $79,260 (plus credit counseling fees) to pay off that debt at the reduced interest rate under the DMP. Her credit will be damaged while she's in the program, but perhaps not as significantly as under a different type of debt reduction program. But what's the cost? Let's say another type of debt reduction program is able to resolve her debt for 45% of what she owes, with no additional interest accruing. That $70,000 debt is now able to be eliminated for just $31,500. And if she can manage to pay the $1,321 per month as she would under the DMP, her debt is eliminated in just 24 months (compared with 60 months in the DMP). So her credit is hurt for 2 years, but she's now debt-free, and has 3 years to repair and rebuild it by making all her payments on time.
So let's look where Borrower #2 would be at the end of 5 years under each option… with the DMP, she has just made her last payment (totalling $79,260 plus fees), is now debt-free and emerging from her damaged credit profile. Under the alternate program, her credit report shows that she WAS way behind on payments 3 years ago (which significantly impacted her credit score), but has been debt-free and making payments on time for the last 36 months (which has helped to rebuild her credit). Oh, and by the way, she saved about $50,000 by choosing this option over the DMP.
So you can see that it really depends on your individual situation whether a DMP through credit counseling is a good idea for you. If you only owe a small amount, it may be a good option. But if you have a significant amount of unsecured debt, you may want to weigh the additional cost of the DMP versus the savings that you can achieve through a debt resolution option.
However, I DO NOT RECOMMEND CHOOSING ANY DEBT SETTLEMENT COMPANY, but not for the reasons that most people suggest. I’ll advise you not choose a debt settlement company because – even if you do (somehow) find a high-integrity, ethical debt settlement company – there is a far superior alternative: DEBT RESOLUTION. The concepts are similar, but because Debt Resolution is an attorney-managed program (as opposed to a private comany), it provides invaluable benefits that debt settlement simply can not offer, and at a lower cost. There isn't room to go over the differences here, but you can check out my answer to this question (copy & paste in a new browser window):
http://answers.yahoo.com/question/index;_ylt=AhQIdMaQHurT6MMwgtm9FM7ty6IX;_ylv=3?qid=20100301082225AAYrSCm&show=7#profile-info-s1OLajFVaa
To find out more about how you can reduce your unsecured debt by 55% (guaranteed) and reduce your monthly payments by 50% or more, and do so while avoiding harassing creditor calls, surprise tax bills, and exorbitant fees, visit http://www.BetterThanDebtSettlement.com
Not while on the plan, and maybe even for years later. It is a catch 22 to sign up for those things.
It is best to pay the higher fees but make regular payments to your creditors than to pay someone else who takes away all the credit you have, regardless of whether you are in good standing with them. The debt management co. will take money from you too anyway
Call CCCS and ask your counselor how this should be handled.
If the credit counseling agency is legit, the fee should be paid by your creditors. For example, if you agree to pay $50.00 towards the debt through the agency, the agency will charge your creditor a 10 to 15% fee. That is not an addition to your debt.
If you are considering a debt management plan, make sure you use an NFCC member. These are legit, non-profit companies that offer debt management programs for a nominal fee. http://www.nfcc.org/.
While in a debt management program, it is noted on your credit report and will adversely affect your credit. However, once you complete the program, that notation is removed and you will have decent credit.
Frankly, if your financial situation is so bad that you need a debt management program to deal with your debts, you are in no position to take on any new credit. Better to stop obsessing over your score and concentrate on ways to pay off the debt faster.