Credit counseling can be useful, but a debt management plan pays the bills

With the new bankruptcy legislation, the Bankruptcy Abuse and Consumer Protection Act, about to become law, many consumers with no previous experience with credit counseling will soon become clients of such agencies. The purpose of credit counseling is twofold; to make clients aware of how they have been mismanaging their money and to make sure that they can avoid such problems in the future. After all, there is nothing gained from credit counseling if the client resorts to problem spending once the counseling is over. The ideal result of credit counseling is a customer who understands the problem of overspending and can stay away from making a bad situation worse.

An additional benefit of credit counseling is that the agency may be able to assist the client in the formation and execution of a debt management plan. Also known as a DMP, a debt management plan is a formally organized, structured repayment plan that allows the client to pay off the debts on a mutually agreeable schedule.

A debt management plan is organized by the counseling agency in cooperation with your creditors. In exchange for agreeing to pay the debts on a prearranged schedule, your creditors may agree to waive late fees or other fees and may lower the interest rate on the amounts you owe. With such a plan in place, you will make regular monthly payments to the counseling agency. These payments may include a small fee to the agency itself. From these payments, the agency will pay your creditors on your behalf, and this will continue each and every month until your debts are repaid. This type of plan works best and is most often used for unsecured debt, such as student loans or credit card debt, rather than for mortgages.

There are numerous advantages to such a repayment schedule. The number of bills you must repay are reduced to one; you only make a single payment to the counseling agency each month. The fewer the payments you need to make, the easier it is to make sure it gets paid. In addition, the reduced interest rates and waived fees may make the payments more affordable. On the downside, you must repay this, on time and in full, or you may find your credit report seriously damaged for the next seven years.

Should you pursue a DMP through a counseling agency, be sure to also contact your creditors directly to verify that the terms are correct. Don’t take your counselor’s word for it that fees have been waived or that interest rates have been lowered. Verify it personally. You want to make absolutely sure that the debts that you assume are being paid actually are being paid. After that, all you need to do is make sure you repay them. That, after all, is what counseling and a DMP are all about.

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