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clients send a single payment to the debt management agency, which it then disperses to the creditors. Debt management agencies establish a structured payment schedule for clients, helping them to reduce debt faster than they might on their own with the help of reduced interest payments and waived fees. A debt management plan also emphasizes education around credit to help clients establish good debt management habits for the future.After enrolling in a DMP, the accounts in question are no longer considered delinquent, so creditors and collection agencies stop calling within a month or so. Debt settlement fi rms fi rst require that clients stop paying all credit bills for 3-6 months depending on the fi rm. Then, the client is responsible for paying a monthly payment to the settlement company for up to 3 years to try and accumulate a large lump sum of money, which the settlement company keeps in a separate bank account before they will even attempt to contact the clients’ creditors to try to settle the debt. They will only attempt to negotiate with creditors for a settlement when they believe

Debt Settlement vs. Debt Management Programs

When credit card bills mount up and you fi nd yourself struggling to pay the monthly minimum, it is far past time to seek help. Debt is a major issue in the US. 43% of Americans spend more money in a year than they earn, and 46% of Americans carry over debt from month to month instead of paying their cards off. Households with credit card debt owe an average amount of $15,800. These fi gures create a grim picture for how Americans approach fi nances. Fortunately, there are many debt elimination programs available to help people manage their fi nancial burdens. Here is a more in-depth look at two of the more common of these programs, debt management plans and debt settlement.

How They Work

A debt management program (DMP) operates by lowering a client’s interest rates and late fees to make monthly payments more affordable. The program lasts for a period averaging 3-5 years. Clients will close their credit accounts, and instead of continuing to pay creditors,

they have accumulated enough money from the client to do so. This model relies on the creditors’ willingness to negotiate rather than risk a total loss. However, there is no guarantee that creditors will agree to lower the outstanding balance, which will only have increased during the delinquency period. Additionally, as clients wait the required period before the settlement agents enter negotiations with their creditors, collections agencies and creditors will still continue to call and demand payment.

The Impact on Credit Score

When a client enrolls in a debt management program, the label “DMP” will appear on the client’s credit report. This notation has no negative consequences on a credit score. Clients may actually improve their credit scores while participating in a debt management program because they are again making consistent, on-time payments on bills. Attempting debt settlement, however, can be highly detrimental to a person’s credit score. Even being late on one credit card for one

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month can lower a credit score by 50 points. When several credit card accounts remain delinquent for up to six months, the toll can be enormous. Furthermore, if the settlement negotiation is rejected, individuals will have taken a hit to their credit scores with nothing to show for it. While the damage will not be as great as fi ling for bankruptcy, it may still be steep.

Costs & Fees

The costs and fees associated with these programs differ greatly. Debt management programs are often non-profi t organizations, vetted by the IRS and the Federal Trade Commission. Programs from these accredited organizations provide free counseling for clients, and may charge a monthly fee for processing and handling typically priced around $25. Some organizations offer entirely free debt management programs, if you qualify. In any case, all applicable fees are fully disclosed at the counseling session before enrollment. Debt settlement groups are not regulated as strictly as debt management organizations, and practices will vary from fi rm to fi rm. Generally, the cost of negotiation is a fl at fee that can exceed $1,000 at some fi rms. Alternatively, settlement negotiators may take a percentage fee of 15-20% of the total debt ($1,500-2,000 for a $10,000 debt). Clients of debt settlement fi rms may also be subject to a monthly fee that can range from $20-100.

Taxes

Debt management plans do not affect a person’s taxes. In debt settlement, however, individuals are responsible for paying taxes on the amount removed from their debt as if it was money they had earned. In other words, if a $10,000 debt is negotiated down to $3,000, the individual is responsible for paying taxes on the $7,000 savings. Depending on your tax bracket, taxes paid on this amount could result in having to pay thousands of dollars extra when they are next due.

A Final Word

While these two approaches have similar goals, their different approaches have vastly different consequences for participants. Using a debt management program to reduce credit card debt is best for maintaining a credit score and developing good debt management habits. Debt settlement, on the other hand, causes great damage to credit, and incurs steep costs while ultimately remaining a gamble.Debt management programs offer clients a creditor-approved approach to fi nancial recovery while still offering signifi cant savings. People who have a steady income but can’t afford their monthly credit card bills should look into credit counseling and debt management programs to get a fresh start.

Advantage Credit Counseling Service, Inc. is a non-profi t consumer credit counseling organization that has been helping clients recover from fi nancial debt since 1968. Through free fi nancial counseling and debt management programs, Advantage CCS saves clients thousands of dollars in interest and late-fee payments. To enroll in a program for credit card debt help, contact Advantage CCS.

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