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Evaluating a Debt Management Program

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Daniel Cohen
UpdatedDec 2, 2022
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    3 min read

When you are struggling with debt, it can be very difficult to sort through the different management programs that are available.

Even after you weigh the pros and cons of each available program, finding the right firm to assist you requires a systematic approach.

To find a reputable and effective debt management program, there are several factors you should consider.

The first, factor to consider is the length of time the company has been in business. If a company has been around for one year, yet they propose a plan for five years how can the company be confident the plan will work if they lack the experience to prove the effectiveness?

Don't rely on an ad, a slick website, or a smooth presentation. These are not necessarily bad, but no matter how good they are it's crucial to consider the feedback from independent organizations that have evaluated the company. The BBB is a good place to start.

It is important for you to do as much research as possible before you make the decision to work with any debt resolution company. You should consider how enrolling in any program can impact your financial situation, not only in the short term but in the long term as well. Each program has negative and positive aspects. A red flag that should concern you when speaking with a debt resolution company is if the company fails to disclose the potential negative impact the program will have on your credit.

We recently wrote a review of one debt resolution firm, Freedom Debt Relief Customer Review, which gives you an idea of what to look for in a debt resolution company. Below, I outline the fundamental aspects of the two most common debt resolution programs, credit counseling and debt settlement.

Credit Counseling

Credit counseling, or signing up for a debt management plan, is a very common form of debt consolidation. There are many companies offering credit counseling, which is essentially a way to make one payment directly to the credit counseling agency, which then distributes that payment to your creditors. Most times, a credit counseling agency will be able to lower your monthly payments by getting interest rate concessions from your lenders or creditors.

It is important to understand that in a credit counseling program, you are still repaying 100% of your debts -- but with lower monthly payments. On average, most credit counseling programs take around five years. While most credit counseling programs do not impact your FICO score, being enrolled in a credit counseling debt management plan does show up on your credit report, and, unfortunately, many lenders look at enrollment in credit counseling akin to filing for Chapter 13 Bankruptcy -- or using a third party to re-organize your debts.

Debt Settlement

Debt settlement, also called debt negotiation, is a form of debt consolidation that cuts your total debt, sometimes over 50%, with lower monthly payments. Debt settlement programs typically run around three years. It is important to keep in mind, however, that during the life of your debt settlement program, you are not paying your creditors. This means that a debt settlement solution of debt consolidation will negatively impact your credit rating. Your credit rating will not be good, at a minimum, for the term of your debt settlement program. However, debt settlement is usually the fastest and cheapest way to debt freedom, with a low monthly payment, while avoiding Chapter 7 Bankruptcy. The trade-off here is a negative credit rating versus saving money.

Bills.com makes it easy for you to apply for traditional forms of debt relief.

Struggling with debt?

If you are struggling with debt, you are not alone. According to the NY Federal Reserve total household debt as of Quarter Q2 2022 was $16.15 trillion. Student loan debt was $1.59 trillion and credit card debt was $0.89 trillion.

A significant percentage of people in the US are struggling with monthly payments and about 26% of households in the United States have debt in collections. According to data gathered by Urban.org from a sample of credit reports, the median debt in collections is $1,739. Credit card debt is prevalent and 3% have delinquent or derogatory card debt. The median debt in collections is $422.

Collection and delinquency rates vary by state. For example, in Louisiana, 16% have student loan debt. Of those holding student loan debt, 10% are in default. Auto/retail loan delinquency rate is 7%.

Avoiding collections isn’t always possible. A sudden loss of employment, death in the family, or sickness can lead to financial hardship. Fortunately, there are many ways to deal with debt including an aggressive payment plan, debt consolidation loan, or a negotiated settlement.

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