Why Debt Management Plans Usually Don’t Work and What to Do Instead
Beware of debt management plans!
Debt Management Plans* are often expensive and fail because:
- You need to pay an upfront cost before they begin contacting creditors.
- You often need to pay a monthly fee for them to continue work.
- The ‘deals’ that are being negotiated look good because it’s a lower interest rate and someone else is dealing with them but if you miss a payment, it’s disastrous.
- By the time you pay the negotiated debts and the company you hired, you can’t keep up with your ordinary living expenses even if you live frugally.
What are the alternatives?
- Call the creditors yourself and get a deal in writing that states that interest is on hold, what you are paying monthly and by what date. This may get you a manageable debt repayment plan. If you can’t deal with your creditors or feel they aren’t taking you seriously, get an attorney to negotiate it. An attorney can also advise you on whether it’s doable to pay back your creditors given your income stream or whether you should look at Chapter 7 bankruptcy.
- Debt consolidation – If you can get a loan at a rate that is less than what most of your creditors charge and you are certain you can make the monthly payment plan, sure. Before you sign, you have to be certain this is your best option because most debt is likely to be unsecured but once you sign, your house or car or other item of value is on the line since debt consolidation loans require security. That means if you can’t keep up the payments, you lose your house or car or other security. This is a dangerous option and is one I rarely recommend.
- Play Search and Destroy – List your Debts and put an asterisk by the ones that have the highest interest rate. Make up a plan to pay your standard bills, pay each of your debts but put more money into paying off the high interest bills. Don’t ever use cards like department store, gas station and other cards that have high interest rates. This works for some people but needs to be done carefully.
- Cash out your retirement or take a loan from it to pay bills – Usually the worst option! Before borrowing or liquidating your retirement, please talk to an attorney or you might join the long line of people who lost their retirement, still didn’t get out of debt and then found out from their bankruptcy attorney that their retirement could have been saved.
- If your calculation of your income minus your debts minus your cost of living leaves you at a deficit or struggling, consider calling an attorney to review all your options including Chapter 7 bankruptcy. Yes, Bankruptcy affects your credit score but so does being late on debt payment and failing to pay at all.
* Unless you are working with a non-profit debt management group; there are legit operations but they’re outnumbered by the for profit debt management ghouls who are mostly paid by credit card companies