A DebtGoal participant wrote in:
“In January, I signed up with a debt management company and I’m currently into my 4th month on their debt management program. I have accumulated over 15K in cc debt and on this DMP, I pay $30 to the company and $389 (paid directly to principle balance) is debited monthly from my checking account which is disbursed to my creditors ( 6 total). The $30 is reflected in the $389. Prior to the DMP, I was having to dish out at least $500/month (just for making the minimum payments on all cards) and I was barely, barely making it. I’m still unsure if I made a wise decision in signing up for the program, but I’m definitely breathing a lot easier.
My question is this: What is the difference between debt settlement and a dmp? … I guess I’m having a difficult time grasping the concepts. Is one better than the other? Also, what are the pros and cons of a DMP?
Thank you.”
1. Both only deal with unsecured credit card debt. They don’t try to help you manage your entire debt picture.
2. The degree to which your creditors are cooperating is a key indicator. Credit Counseling companies were originally established by the credit card companies (yes this is true–they’re almost like debt collectors for card companies) while debt settlement companies operate independently. Credit card companies agree to let borrowers participate in a DMP and make some concessions on interest rates based on how distressed a borrower is (usually measured by the debt payments relative to cash flow after expenses). Card issuers do this figuring that they’re better off getting you to repay as much as they can and are willing to cut your interest rates to keep you paying rather than have you default. When you’re set up on a DMP, you agree to pay a monthly amount to the DMP administrator who then pays it out to the card issuers. So with a DMP, your debt is paid down over time gradually. As an aside, credit counselors get paid money by the card issuers for collecting balances. This amount is called “fair share”. For this reason, the IRS is thinking about classifying them as for-profit debt collectors.
3. Debt settlement works differently. Under sebt settlement, your company will negotiate to reduce balances with your card issuers. Generally speaking, they will have you quit paying your creditors and build up a cash reserve. During this time, your debt becomes past due and will eventually move into collections. At that point, the debt settlement company will step in and offer a lump sum pay-out and hope that the creditor is worried enough that they will have to write off the loan that they will accept the lump sum. Debt settlement companies promise that they can get your principal reduced by up to 50% by negotiating in this way.
4. Fee structure is different for the two programs as well. DMPs usually charge an up-front setup fee and then a monthly administration amount of $25-50 while you’re on the program. Debt settlement companies generally charge a very large up-front fee, usually about 15% of the total debt on the program. The borrower discontinues payment to creditors until this amount is paid off (during which accounts go delinquent, fees accrue, and the account moves into collections). After the debt settlement company is paid, they then build up balances that they use to approach your creditors and negotiate down your debts.
5. Success rates vary dramatically by program as well. Successful completion of debt settlement programs is estimated by some government administrators to be less than 15%. If you don’t complete the program, it’s possible to leave owing more than you did before you started (remember that interest charges and fees accrue when you quit paying).
6. Impact on credit score. Debt settlement will absolutely trash your credit score, similar to bankruptcy. But if you’re desperate enough to enroll in the program, it’s likely that your credit is already pretty bad. DMPs are noted on your credit report but don’t impact your score. Under DMPs, you’re prohibited from taking out new debt.
So there are real differences in the programs. Both programs can actually be good or bad, depending on the borrower’s situation. We believe that debt settlement is better than bankruptcy but is not appropriate for users who could get out of debt on their own or participate in a DMP. Similarly, DMPs are appropriate for borrowers who cannot pay off debt on their own and need concessions from lenders to make progress. In general, DMP suitability guidelines are meant to ensure that only borrowers in these circumstances are approved. Both programs have generally been over-marketed to customers for whom they are not appropriate and, as a result, are under severe investigation by the FTC and the states of New York and Texas.
At DebtGoal, we have designed our product to meet the needs of users who are not distressed and can make progress on their own. Our program helps users build good financial habits and make reliable, effective progress on their debt over time. By allowing users to include all types of debt instead of just credit cards, we give a holistic program for managing debt in a manner that makes sense for your personal financial situation. Since both DMP and Debt Settlement programs are relatively inflexible (a high cause of drop out) the DebtGoal program recognizes that borrowers will encounter difficulties that can set them back and allows them to come back to the program when they are able. Simply having a consistent payment plan can pay off your unsecured credit card debt nearly as quickly as with a DMP.
In short, DMPs and Debt Settlement may be appropriate for some borrowers but people looking into these programs should be aware of the pros and cons of the solution. In general if you are able to make your current minimum payments, you are much better off with a do-it-yourself program like DebtGoal.
I hope this helps. Please post questions if I can help answer this better.
Scott Crawford is CEO of DebtGoal.com, a do-it-yourself system for getting out of debt and lowering your interest costs. DebtGoal.com incorporates all of the techniques discussed in this post and can help users understand and get visibility to and manage their debt finances.
Tags: adjusting mortgages, consumer borrowing drops debt plan, consumer spending under control, credit card borrowing and debt, cutting the cable and debt, cutting the phone and cable TV bill, debt elimination, debt elimination in a marriage, Debt Management, debt management strategies for couples, debt plan, debt plan when married, debt reduction, debt reduction plan for a couple, debt reduction with new work, debt strategy, debt when married, debt with credit card overusage, digital services and debt, digital services rate reduction strategy, digital services with debt, discretionary cost strategy with debt, drop in credit card borrowing, frugality, getting back into the workforce to eliminate debt, marriage communication on debt, marriage communication with debt, marriage debt planning, marriage finances with debt, marriage spending with debt, mortgage adjustment, mortgage management, mortgage modification, mortgage reconfiguration, mortgage renegotiation, mortgage resolution, one income household and debt, saving money for debt elimination, second income family and debt, the debt guide to digital services, two income household and debt
