How to Handle Debt Management Agencies

Key Definitions

1.    Principal – This is the original sum lent to the borrower or invested in a business.

2.    Interest rate – This is the percentage of the principal that is charged to the borrower every month. It is the additional money paid on top of the principal.

3.    Non-profit organization – Non-profit organization is a firm established for any other purpose except making a profit. No earnings of the organization are distributed to its officers, members or directors.

4.    Better Business Bureau – This is a non-profit organization which was established to foster market trust.

Introduction to Debt Management Agencies

Generally, there are two kinds of debt management agencies – debt management agencies that charge a fee for their services and charitable agencies that provide free advice.

The main goal of charitable debt management agencies is to offer you free face-to-face session with a professional paid to assist you get out of debt, as opposed to making cash from you.

Charitable agencies are different from agencies or firms that claim to provide "free help." Most "free debt management agencies" only claim to be free, but they have other means of charging you.

Sadly, most charitable firms are facing major backlogs due to the increasing debt issues, with the credit bureaus saying it deals with over 7,300 new debt issues every day and individuals in some regions having to wait up to four weeks for an appointment.

On the contrary, fee-charging agencies often deal with issues quickly. Even better, they remit payments for you – you deposit money with them and they transfer it to your creditor (s). You are charged a small fee for this service, often about 1.5 percent of your total deposit. However, fee-charging firms are able to bargain better terms with creditors which means that the fee is almost always worth it.   

Choosing a Reputable Debt Management Agency

No matter how deep into debts you are, it is never too soon or too late to seek the services of a debt management firm to help you get out of your financial problem.

You can always evaluate how likely a debt management agency is to help you design a sound debt management plan and implement it by considering the following:

1. Find a Licensed Agency

If you wish to entrust your monetary stability to an agency, you want to ensure the firm you select is licensed to provide such services in your state. You can even go further and visit the Better Business Bureau to verify the agency's standing and reputation.

2. Avoid Large Fees

Most reputable and viable debt management agencies are operated as non-profit firms. Without the profit goal, their focus is very much directed at doing what is best for the customers. There might be a small fee, but anything that seems to be profit motivated need to be examined. The fact is that honest debt management agencies understand they are dealing with individuals with financial problems and do not want to worsen their situation.

3. Everything Should Be in Writing

Before enrolling the services of an agency, you should get a contract in writing stipulating the fees, what the agency is going to offer, and authorizing the firm to negotiate with creditors on your behalf.

4. Questions to Ask

There is no better way to inspect a debt management firm than to ask the following question:

  • How long has the agency been in business? Stay away from recently established firms and move toward firms with long and reputable track record.

  • Is the agency licensed to conduct business in your state? As we saw, debt management agencies should be licensed but this is not enough. Ensure that the firm you want to enroll with is licensed to operate in your region.

  •  Is the agency accredited by the Better Business Bureau? Better Business Bureau accreditation is among the best ways to get a debt management agency that delivers high-quality services. 

  • Can the agency help you consolidate debts without the need to borrow more money? Some debt management firms force clients to take more loans but if you think this is not the right path for you, do not register with such firms because you are definitely right.

  • How much does the agency charge for the service? The best agencies provide a free consultation or counseling and low-cost consolidation services, and they are often up-front and clear about their charges. 

    Interested in learning more? Why not take an online Debt Reduction course?
  • Can you waive your charges in case I am faced with hardship? Non-profit debt management agencies often waive your fees when things get worse.

In addition to the above factors, ensure that your debt management agency has the following six qualities:

  • It is a non-profit firm – A non-profit debt management agency benefits its clients by offering credit counseling services for free or at a very low cost. This is because its services are funded in part via government grants, contributions from creditors or donation.  

  • It has been in operation for over seven years - A reputable debt management agency should have the experience as well as the expertise, through its professionally trained counselors, to assist regain control of your money and to create effective strategies for a debt-free future.

  • It is licensed through the right regulatory agency – A reputable debt agency should not only be licensed to operate in a certain are but it should also update its practices and services to comply with the current legal needs.

  • It charges rational fees – Unlike debt reduction organizations that charge a percentage of the total debt they settle, a reputable debt management agency charges the least possible fees for its service.  

  • It has certified credit counselors – A good agency has certified credit counselors, who help you to assess your financial situations, repay your debts as well as use credit sensibly in future.  

  • It is a member of a recognized trade union – A reputable debt management firm should be a member of recognized trade union such as National Foundation for Credit Counseling.

If the above information is not clearly displayed on a firm's web, call them and inquire for the answers.

Although debt management firms are good at what they do, they are not suitable for everyone. Therefore, it is important to understand these firms before making your final decision.

Pros and Cons of Debt Management Agencies

Debt management is a growing industry as more and more people are drowning in loans and credit card debts. With over a thousand adverts promising swift debt relief, these agencies are tempting to people struggling with financial problems. But what are their advantages? And do they have disadvantages?

Pros of Debt Management Agencies

1. Your Interest Rates Will Drop

Once your agency contacts your creditors, they will immediately drop your interest rates by a few points, often to a rate between12 and 16 percent. This is a huge plus if you are paying 18 percent or more, and particularly if you had delayed payment before and you are paying a default interest rate of 20 percent or more. These reduced rates can save you hundreds of dollars.

2. Fee Will Be Abolished

Your debt management firm may convince your creditors to abolish late-payment fees, saving you up to $40 per creditor every month.

3. You Only Have a Single Monthly Repayment

The main benefit of debt management agencies is their ability to consolidate your debts into a single payment plan. The debt management firms then distribute the payment to different creditors. This saves you a lot of time and hustle.

4. You Avoid Bankruptcy

It is heartbreaking to be declared bankrupt, and thus the reason why debt management firms provide an alternative option. However, registering with a credit counselor or debt management firm is a precondition for filing for bankruptcy. Therefore, even if you realize that you will not be able to repay all your debts after trying debt management agencies, filing for bankruptcy is still a viable option.

5. Your Debt Is Placed on Autopilot

After enrolling with a debt management agency, and letting all your debts be paid by your agency every month, you will never need to worry about your loans or debts again. Your repayment is auto-debited from your account, and your debts will be cleared within a few years. It is advisable to allocate more funds to your repayments if possible, and this simply involves logging into your debts management agency account page and adjusting your payment.

6. Your Credit Score Might Improve

Many experts have written about how these agencies hurt your credit scores. This is not always true. In fact, if you have a few late payments or you are way behind on your credit repayments, chances are a debt management agency will actually boost your scores.

Cons of Debts Management Agencies

1. You Can Do It Yourself

The responsibilities of debt management agencies involve contacting your creditors as well as negotiating alternative payment programs, hopefully with lower fees and interest rates. But you can do it too. Most creditors are eager to assist debtors meet their debt obligations as they do not like to see people being declared bankrupt, which destroys their business. Talking to your lenders directly is not easy or pleasant, but it is possible.

3. Your Credit Score Might Drop

As we saw, debt management agencies can either boost or drop your credit score. If you have a lot of debts but you are repaying them on time, enrolling with a debt management agency will definitely drop your scores. This is because as your agency renegotiates with your creditors, the terms of repayments might change leading to late repayments being noted on your credit report.

In addition, your creditors will close your accounts when you enroll in an agency, and the good history report from these accounts will be erased from your credit report.

Quick hint:

Whether your credit scores go down or up in the short-term, registering with a debt management agency is a long-term decision, and repaying all you debts is the only thing that can improve your scores. Eventually, enrolling with a debt management firm will help you repay your debt – which is great for your credit scores.

4. You Need to Give-Up New Loans

Once you register with a debt management agency, you will be barred from applying new lines of credits. If you apply, you might risk the benefits your agency renegotiated for you. But given you are in debt, are you very sure you won't need a loan?

5. It Takes Time to Be Implemented

Once you have enrolled in a debt management firm, it can take more than one month before your creditors get their first payment. This often means two things:

  • You will need to make at least one-month payment on all your debts to avoid being faced with late payment credit report. This means making double the payments: one to the debt management agency and the other to the creditors. Otherwise, you will have a late payment mark on your report.

  • You will still receive collection notifications from your creditors before they get the first disbursement from your debt management firm. Sadly, the debt management firm cannot stop these calls, but most creditors will be satisfied if you inform them that you have enrolled in a debt management plan and will not pursue you.     

If you believe that a debt management agency can help you get out of debts, it's recommend you get all the information and conduct a thorough research before contacting any firm. These agencies are lifesavers for some people, but at times they can do more harm than good.

Prohibited Practices

Debt management agencies are prohibited from engaging in some practices. They are often prohibited from:

  • Purchasing any of your obligations or debts.

  • Provide credit or lend money to you.

  • Receive a mortgage or security interest in a home owned by you.

  • Make any misleading, deceptive or false statements to you regarding the service they provide.

  • Request for voluntary contributions from you for their services.

  • Design a contract that would make you owe a higher principal that the original debts.

  • Offer you gifts, premiums, bonuses, money, rewards, or other types of compensation for enrolling with them or for refereeing a potential client.

  • Provide or charge for any insurance.

  • Present a proposal to your creditors to decrease your debt unless you have decided that it will benefit you, and you have provided your written consent to the debt management agency. 

There is no mystical or magical formula for getting out of debts. The solution is simply managing your finance and having a total finance makeover. Good debt management is 80 percent behavior and 20 percent head knowledge. It is not rocket science as some agencies may want you to believe. However, it is not easy and thus the need of having a professional agency to manage your debts.