Frugality Magazine - Frugal Living Tips for Financial Freedom

The Pros & Cons of Debt Management Programs

When you’re deeply in debt it is easy to feel like you’ve lost control of your finances.

Thoughts of how to become debt free can take over your life.

Worry over the debt you’re carrying can make any kind of “normal life” difficult, simply because you’re constantly worrying about making that next debt payment.

Clearly this is no way to live your life.

Which is why some people end up considering a debt management program.

But before you go signing on the dotted line, it makes sense to know what you’re getting yourself in to…

What Is A Debt Management Program?

A debt management program is a service offered by debt management companies. These programs typically aim to make paying off your debt easier in a number of ways:

  • Creditors are negotiated with, in order to reduce the overall debt burden
  • Repayment plans are negotiated, in order to help to meet your monthly obligations
  • A communication channel is established between your creditors and the debt management company in order to save you from the debt-chasing letters and phone calls which can be so stressful

The end result is that you’re able to take your existing debts and make them into something more manageable.

What Are The Benefits of Debt Management Programs?

If you’re struggling to pay off your debts right now I’m sure you can see a number of immediate benefits that debt management programs can offer.

Less Debt To Pay Off

Depending on the type of debt management program you opt for, it is perfectly normal for your debt management company to renegotiate your outstanding debts.

They will explain to your creditors that you’re struggling to meet your debt repayments and that you’re seeking some kind of help.

This might involve reducing the overall debt burden or halting any interest payments. The end result is the same though; you end up paying off less debt than you would without the debt management program.

Smaller Debt Payments

Possibly even more beneficial than this reduction in overall debt involves dropping your monthly obligations. If you’re anything like I was a few years ago, then it’s the monthly payments that kill you.

Every time you get paid, a vast chunk of your income goes straight out to your creditors. One “surprise” expense like needing to repair your car or buy someone a birthday gift and the whole house of cards can come toppling down. It’s no way to live.

Debt management companies can help to negotiate your repayment plan and so reduce the amount you must pay back each month. Imagine how your budget could transform if your debt repayments were suddenly dropped by $100 a month, or $300, or more.

Finally you can start to not only get your debts under control but you can also do this while still maintaining some kind of quality-of-life.

You can finally stop worrying about your budget and can afford to “live a little” and start to enjoy life a little more.

No More Chasing Phone Calls

If you’ve ever got behind on your debt repayments you’ll know how unpleasant it is to receive letters or – even worse – phone calls from creditors. After all, if you don’t have it, you don’t have it, right?

If you’re really getting behind in your debt repayments these repeated letters and phone calls can make life a living hell; ignoring those phone calls at all hours of the day.

Most debt management plans however involve your debt management company actually taking over all communication with creditors on your behalf.

The only person you have to deal with is the friendly person at the debt management company who is trying to help you. They deal with all your creditors.

The Downsides of Debt Management Plans

So far I think you’d agree that the picture looks pretty rosy; who wouldn’t want lower debt repayments and none of the debt-chasing letters?

Of course, though, very few things in life are purely positive. If you’re considering signing up to a debt management plan then it also makes sense to take note of the potential cons of just such a course of action.

Negative Impact On Your Credit

The first, and arguably most important downside of debt management plans is that they can have a significant impact on your credit history.

In essence when you take on a debt management company they default on your debts on your behalf and then renegotiate them. Understandably, your creditors often aren’t very happy about this.

The end result is that many of the companies you owe money to may well end up placing a “black mark” against your name with the credit reference agencies.

These defaults will be visible to other companies in the future who may consult your credit record in order to provide future credit.

Difficulties Landing Credit In The Future

The black marks on your credit history aren’t necessarily a bad thing on their own. They’re only bad if you want to take out credit in the future.

What this means is that if you’d like to buy a house or take out a car loan in the next few years you should be very careful. Realistically, signing up to a debt management program can make accessing a decent mortgage in the future very difficult indeed.

Now, of course, your credit history doesn’t last forever. In the coming years these items will “drop off”. You can also repair your credit in the future to speed up the process.

Just don’t be under any misunderstandings; sign up to one of these plans and buying a new house will likely be out of the question for some years thereafter.

Complete Honesty About Your Finances

The final problem with debt management plans is that for best results you’re going to have to be totally honest with the debt management company about your finances.

You’ll have to reveal intimate details about how much money you owe, and to whom. You’ll also have to discuss your earnings and – as a result – what debt repayments you can really afford.

Complete honesty is essential if you are to get the best result possible from the plan.

For most people this can feel rather alien and uncomfortable. However it is important to appreciate that these debt management companies deal with people like you every day; there’s very little they haven’t seen before and there isn’t much which scares them.

So while it might feel weird to you, for them it’s really just another day at the office.

Conclusion

Everyone has their own opinion on debt management plans. Some people believe they are terrible things that can damage your financial life for years to come as you struggle to repair your credit. Others, like me, realize that they can be a useful financial tool – especially if you’re struggling to keep up with your debt repayments.

The key is to fully do your research in advance so that you know exactly what you’re getting yourself into.

If you’re considering a debt management program why not check out National Debt for a free quote?

Would you ever consider using a debt management plan? Why? Please leave your opinions in the comment section below…

 

The pros and cons of debt management programs. Find out if debt management companies can really offer you a viable solution to paying off debt.

Richard

Tarantula-keeper, sun-worshipper and obsessive frugality blogger. For loads more money-saving advice come and join us on Facebook.

Add comment

Hi, I'm Richard, a UK personal finance blogger on a journey to financial freedom.

I've paid off my consumer debt thanks to a frugal lifestyle and now I'm saving hard for the future.

Why not stay in touch by following me on social media?

Rockstar Finance