1. Credit counseling, debt-management programs — it’s all the same.
Credit counseling involves helping consumers develop a budget and the discipline to make steady payments to clear their debt loads. In a word, it’s education. Most of these individuals make a decent living, but at the end of the week don’t have enough money and don’t understand why.
Debt-management programs — or DMPs as insiders like to shorten it — are one tool in the credit counselors’ kit. Basically, the DMP plays policeman, taking your monthly lump-sum payment and distributing it to your creditors until the accounts stand at zero. They then close those accounts. Less than 35 percent of the people who call consumer credit counseling agencies truly can benefit from a DMP.
2. Credit counselors can cut your monthly payments in half.
No such luck. This is a numbers fudging claim that holds true only in the narrowest of circumstances. For instance, if you miss two $200 payments on a $10,000 balance, the third month’s bill will make it $600 that you owe. DMP personnel re-age that bill, knocking your payment amount back to $200. You haven’t escaped anything — the missing money was merely tacked back onto the total owed.
And most folks who walk through his doors haven’t missed payments. These harried souls will see a bit of relief from an interest reduction, but by no means will they magically owe only half their bills.
3. Some agencies can negotiate lower DMP payments than others.
That would be true if these debt-management programs involved negotiation. They don’t. A majority of creditors have existing programs where they automatically shuffle off 95 percent of individuals enrolled in a DMP.
If a counselor indicates differently, you are in the clutches of a debt-settlement program. This version accepts your monthly lump-sum payments, but holds that money until creditors scream. At that point, the debt-settlement personnel negotiate to repay cents on the dollar. Your credit rating gets maimed in the process.
4. Debt settlement companies are the cheapest way to go.
Anyone introduced to a debt-settlement program needs to run hard in the opposite direction. It’s just wrong to make payments on an account and have the money sit in someone else’s pockets until the creditor gives up on the collection calls. The real skunks insert a clause in the contract that says if you miss a payment to the debt-settlement company; it keeps all the money in the ante as a fee.
Secondly, this route dings your credit history severely, as all those “pay us now” letters count against you, not the company. Finally, the amount the creditors forgive in the end is considered income for you, and you owe taxes on that amount.
If you have any questions please feel free to give me, Sally Bernard, a call 308.238.0201 or email SallyBernard@AFGspecialist.com
Information provided by Bankrate.com