What Does A Debt Management Program Do?

With the many advertisements out there, promising one easy payment and an improved credit report and credit score, it can be difficult to figure out what service it is that a debt management program actually provides. A debt management program can work to your benefit in a variety of ways. Always ask before you sign on the dotted line.

Many debt management programs begin by calling your various creditors and trying to get them to settle for smaller amounts or at least to lower your interest rates or reduce fees. Remember that any amount that is deducted from a debt owed is reported on your taxes as income: for example, if your credit card company forgives $5000 of a loan, that 5K is reported to the IRS as income and you will need to pay taxes on it.

Some debt management companies try to get companies to settle by withholding your payments to them, in the hope that the creditor will then be willing to settle for less. Consumers using their services have been surprised to find that even though they are sending off the checks each month, their balances are not going down and creditors continue to call. This method can also be detrimental to a person’s credit score, as a 60 days past due note would definitely appear on the credit report.

Many debt management and credit counseling services do not do this, instead focusing on slowly paying off your debt and trying to get your creditors to work with them to lower interest rates and to perhaps settle for a lump sum payment if you have the money.

Once you are signed up with a debt consolidation company, there will be rules. You might not be allowed to open any new credit accounts. You might not be able to prepay your bills. Check with your credit counselor before you sign to ensure you understand what is happening with your money and when you will be finished the program. Once you have signed up, and the debt consolidation company has contacted your creditors with offers stating how much you will pay each month and for how long you will pay, if all of your creditors agree, you simply send your check to the debt consolidation company once each month, occasionally checking your credit report to make sure everything is going well. Some of your creditors may refuse to work with the credit counseling or debt consolidation company, and may require you to pay them separately.

Your credit counselor can help you deal with this company, perhaps sending them a better offer or perhaps you might have to make a certain amount of on-time payments to this creditor before they will agree to go on the program. A debt management program makes certain all of your creditors are paid on time. You send them one check each month, and they send out checks to each of your creditors in the amount they got the creditor to agree to.