Are Debt Management Plans Something To Use or Avoid
When a person faces debt – a tremendous amount of debt – they may turn to nonprofit credit counselors for help. However, credit counselors have peddled the well-known debt management plan, which isn’t a one-size fit all scenario.
Debt management plans are considered a worthwhile alternative to bankruptcy and a reasonable way people can pay their debts back. People will make their payments to the counseling agency, who then pays their creditors. With established agreements between counselors and credit card companies, it works to decrease payments, interest rates and fees. It can take up to five years for the debt to be fully paid off.
When borrowers make their payments and pay off the principal, the debt management plans don’t affect their credit scores like other kinds of debt relief.
In Manhattan, Kan., Francine Bostick paid over $120,000 in credit card debt in 2012, and recently was able to purchase her first brand-new car. She said she was a bit nervous when they did a credit check, but she was able to attain a zero percent interest rate for the loan.
Bostick may actually be an example of what is wrong with credit counseling. Several consumer advocates were flabbergasted when Bostick and her husband were named 2012 “Clients of the Year” by the National Foundation for Credit Counseling. According to them, counselors should have advised the possibility of bankruptcy due to their circumstances - the couple’s age and the fact her husband was suffering from Alzheimer’s disease.
Instead, Bostick worked 12 hours a day to make the debt payments while also taking care of her husband, who got sicker and died in May. According to critics, it was more important to focus on her dying husband and use the additional money toward her retirement savings.
Bostick said she was informed that bankruptcy was an option, but she didn’t talk to an attorney about it. She said the decision to pay off the debt was better than filing for bankruptcy and being in debt again.
Other problems associated with debt management plans:
They don’t address other kinds of debt – student loans, car loans, installment loans, mortgage loans and medical bills.
Borrowers won’t have access to credit in the repayment period. Credit card accounts are closed, and they can’t apply for new credit during the repayment period. If a new account shows up on a credit report, they may cancel the agreement.
Little to no leeway if you miss payments – plans could be canceled.
There are some folks who learn that they can’t afford the payments the debt management plans offer and others drop out due to unexpected setbacks.