Will Debt Management Work for Me? |
By Kenneth Long on January 20, 2010
A debt management program works by gaining creditor concessions on your behalf so that you can better afford minimum payments while repaying your debt at an accelerated rate. There are many benefits that can come with a debt management program. That being said, they are not for everyone.
Which Accounts are Eligible?
Debt management programs are very effective when dealing with unsecured debt accounts. These typically include credit cards, store cards, unsecured personal loans and lines of credit. Other debts may also be added, but they do not typically receive substantial benefits.
Most major creditors that fall within these classifications participate in some way in debt management programs. If these are the accounts you are having the most trouble with, then a debt management program should be strongly considered as an option for improving your financial situation.
Who Qualifies for Benefits?
Participating creditors require that you show financial need. That means that clients who have substantial budget surpluses would not qualify for benefits.
Inversely, having too deep of a budget deficit would also disqualify you from a debt management program. Your plan must be feasible over the long term. If you cannot demonstrate reasonable ability to stick with the program, then you would be disqualified.
Most successful debt management program participants were at or below a break-even on their monthly budget prior to enrollment. Some were current while others were anywhere from 1 to 6 months delinquent. There is normally no requirement to be either current or delinquent in order to qualify.
What Types of Benefits Could I Expect?
Debt management programs normally include substantial reductions in interest rates. It is not uncommon for a client to see their interest rates reduced by more than half when they join a debt management program.
Lower finance charges allow for lower monthly payments. Since the monthly payment is a calculation that includes the monthly finance charges, reducing those charges allows for a lower monthly payment requirement. Most such creditors reduce the monthly payment through a debt management program.
The substantially lower interest also has an impact on the length of repayment for included accounts. Since a much smaller portion of a payment goes toward interest, the client is able to more quickly pay down the principal. These principal payments increase each month as the interest payments continue to drop, reflecting a lower principal balance. As a result, the balance drops by an ever increasing rate until repayment is complete, usually within 3 to 5 years.
It is important to note that creditor participation is voluntary. There is no legal requirement for any creditor to participate in a debt management program. In addition, creditor participation may be minor or substantial. Some creditors may reduce interest rates to zero while others offer no reduction whatsoever. While most participating creditors lower the monthly payment, there are some that do not or may actually require a higher monthly payment.
Fortunately, credit counseling works by evaluating your eligibility for a debt management program through an analysis of your debt and budget. You can get a written good faith estimate of what you can reasonably expect by participating in a debt management program without committing yourself. That way, you have a chance to see if it will be beneficial, ask questions and make any adjustments prior to enrolling. You may also contact another credit counseling agency for a second opinion and compare the two programs.
Debt management is a tool of credit counseling organizations that is effective in reducing interest rates, lowering monthly payments and reducing the time of repayment. They are not magic, nor are they easy fixes for severe financial problems. For more information, speak with an Accredited Financial Counselor about how debt management works. |
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