I must admit, I've never used a debt management service. When we first decided to get out of debt, we researched different debt solutions and decided not to go with a debt management company.
You may already know there are many debt solution alternatives:
However, should you decide that using a debt management company is the best debt solution for your financial situation then just beware that there are some good ones and some bad ones out there.
Also, there are a few more things you should consider when making your decision:
What is debt management?
Basically, you sign up with a debt management service company. The first thing they do is call each of your creditors and negotiate to reduce your balances, interest rates, and late fees, to get to a monthly payment you can handle.
You then pay the debt management service a single monthly payment and they hold your money in an escrow account and make payments to your creditors for you. They act sort of like a middleman.
It sounds pretty cool right? Well there are some downsides. First of all, they get paid a commission by your creditors for each monthly payment you make.
They usually get about 10% of your monthly payments and sometimes they get a rebate as well. You need to know this because some companies may be tempted to encourage you to sign up for their debt management services just to get the commissions, even though it may not be the best debt solution for your financial situation.
In other words it won't work for your auto loans, home mortgage or any other secured debts because the secured creditors can just repossess your car or foreclose on your home instead of negotiating with your debt management company.
A further downside is it hurts your credit scores. But this may not be such a big deal if you're already significantly behind in your payments anyway.
But just be aware that as you make your monthly payment to the debt management company, they may hold your money in their escrow account for months before collecting enough to pay the negotiated settlement amounts to some of your creditors.
During this period, you are making a monthly payment to your debt management company but your creditors are not yet getting paid. They continue to report the late payments. So your credit will suffer.
Finally, some debt management companies have been extremely unethical. Should you select the wrong company, they could potentially collect your monthly payments and simply disappear with your money.
If you do decide to go with a debt management company you may want to improve your chances by selecting a company that is accredited through the Association of Independent Consumer Credit Counseling Agencies or the National Foundation for Credit Counseling.