Sorry We Went With Debt Management – Amber

“Dear Steve,

About 6 months ago, my husband and I decided to go with a debt management company to help with the relief of our credit card debt. It’s been a bigger mess than I ever thought it would be. There have been no payments made to any of my credit card companys because apparently the debt management program waits until there is enough funds in the account before they start negotiation with them, therefore, our credit is already shot at this time. I have learned more about how the process actually works and kind of wish that I had never gone with the process in the first place, however, we were in need at the time and really had no other options that we knew of.

My question to you is that…..what should we do from here, should we stick with the debt management program that we are with and trust that they will eventually get this sqaured away for us or should I take this in my own hands and try to negotiate with the credit card company’s myself?

Amber”

I asked my friend Mike Killian to answer your question for you. I wanted to make sure you got an answer as quickly as possible as I’m a bit backed up at the moment. I’ll be watching the comments on this question and be around to help if you need me.

Dear Amber,

My oh my. You have definitely gotten into a situation. Frankly I am confused as to what type service you signed up with as you are describing a situation from both a Debt Management Program (DMP) and Debt Negotiation. There is a distinct difference between the two although at this stage it may not matter a lot as the damage may be already done. However let me first describe the two programs and then I will try to answer your question. Unfortunately some counselors present themselves as one thing but have in mind a completely different situation. This may be what you stumbled into.

With a Debt Management Program (DMP) or credit counseling program, creditors are paid back with a lower interest rate pre determined agreement. The agency handling it should be maintaining an ongoing payment schedule with the creditors. However here is a problem. Some of these companies are a little lax in their operation and can cause problems. But they should never be holding funds… NEVER. This is a reason that a person should first check out such an operation before committing to their program. Check their track record for completion and check their policy for issuing creditor payments. Will those payments be on time or dispensed on a selected day or what? Make them tell you before you commit. Have them show you in writing if at all possible. Ask the Better Business Bureau about them. Find out what their program completion is. A DMP will affect your credit report although usually the agency does not report it. However the creditors assigned to the DMP often report that you are going through a debt management program and that can affect your credit score.

The other program is debt negotiation or debt settlement. With this option you or a professional debt negotiator offer less than what you owe…. Say 50%. That sounds good on the surface but has some drawbacks. In order for a creditor to take less than agreed, they will have to think that is the best they will do. To make them think that, you usually stop payment to them so that they think you will be declaring bankruptcy. The negotiator often “holds” your payment and often simply keeps it as payment. If the negotiator successfully settles your debt for less than owed, a lump sum payment is usually required. Of course in the process your credit is completely destroyed. Additionally any debt forgiven above $600 will be taxable by the IRS as added income. Debt negotiation is rarely recommended for the preferred solution.

The final option of course is bankruptcy and I would defer to you seeking out a bankruptcy attorney for exploring that option given your entire financial picture. Often times an initial orientation visit is free.

After all of that let me try to answer your question by asking a few of my own. What type contract do you have with this group and what is the commitment and what is their plan. I think those answers will determine if you should stay with this group, seek a more reputable debt counselor or elect to file bankruptcy.

As a final thought, you may want to check out Steve’s article on How to find a Bankruptcy Attorney.

Sincerely,

Mike

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