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When an individual feels that they are so far in debt that there is no way out, they may look to a debt management company to help them find a solution. This is because a debt management company provides their clients with a number of options to help them get themselves back on track.

For example, the debt management company may offer a service in which they negotiate the debt with the creditors. This means putting a freeze on interest rates, negotiating a lower payment, and even lowering the amount of the debt. This can save an individual a lot of money and help them get out of their debt faster so that they can start over when the program is finished.

Debt consolidation

Another service that is offered is debt consolidation. This is where you take out a loan that pays off all of your unsecured debt for you. Unsecured debt is that debt in which collateral is not used to secure the loan. For example, a bank may require a car be put up as collateral on a personal loan. This insures the loan because the bank can take possession of that car to recover the money that they would lose if you were to default on the loan. That is why you cannot include secured debt in a debt consolidation loan or any sort of debt management.

The reason why unsecured debt is allowed is because the creditor will be at a great loss if you do not pay the debt or you file bankruptcy. Through a debt consolidation loan, you are given the loan and you use that money to pay off your creditors. It is then that you have just the one loan payment. That payment can actually save you money on interest and can be less than what your individual debts were costing you each month.

Credit counseling

It is usually called credit counseling when the debt management company has to negotiate with the creditors. Now this is where you may see an adverse effect on your credit score. However, the adverse effect is not as severe as it would be if you filed bankruptcy.

You can expect to be in a credit counseling program for a period of up to three years. The debt management company talks to your creditors and negotiates certain terms with them. For example, the debt management company says to them, “If you do not agree to these terms, this person will file bankruptcy and you’ll get nothing.” The creditor would much rather get something than nothing at all, so they will negotiate lower rates, lower interest, and any other terms that you have discussed with the debt management company.

When it is over

The debt consolidation loan is rather simple because you take out the loan and make your payments to pay off the debt. But it is the credit counseling aspect that requires some time. Negotiating lower payments and lower interest is not something that comes without consequence. If it did, then it would be too good to be true.

When the program is over, you will have to work on rebuilding your credit. This can be done by simply charging on one credit card and paying it off before your due date each month. Making payments before your due date is important because many creditors take up to 48 hours to post a payment and that can still result in a late fee. Nevertheless, you can have your credit rebuilt and you can ensure that you don’t fall in the credit trap ever again. That way you can keep your credit score intact.

Amy Nutt is a freelance writer who writes on a variety of financial topics including personal budgeting and debt consolidation. For more information about personal finance and credit counselling, ConsolidatedCredit.ca is a tremendous resource on the topic for Canadians.

Debt Management FAQ:

Question: How to know about the safe amount of debt?
I am planning for loan. I don’t have any idea about the debt management. Anybody suggest me the safe amount of debt?

Answer: The debt ratio depends on the lender’s income. There is no standard safe amount for debt. The safe amount varies according to the income of the person. Lenders typically prefer a maximum debt-to-income ratio of 1:3. Save up your money and then buy something you can afford with cash, rather than incurring a big monthly payment for several years to come. The safe debt also finally depends on your comfort level.

Question: Should you attempt to Debt settlement Companies directly with the creditor?
How can we attempt Debt Settlement Programs and Debt Management Companies?

Answer: Most debt settlement companies aren’t doing anything that you can’t do yourself and they often charge an arm and a let to do it. Contact your creditor(s) and let them know of your situation and see what they offer up. Once you have that offer, come back with one of your own that’s a tad bit more aggressive and then try to negotiate something in between. Once you’ve done that, do NOT send them a single penny until you get the offer in writing. At that point you can move forward in settling your debt.

Question: I have 55K in charged off, 7 year old credit card debt. I have been told CCCS/MMI is the best route.
Although this debt is 7 years old and some reports reflect the removal of the accounts, I would like to satisfy the debts. What is the best route? The original creditors will not speak with me as they have been sold many times over and one is currently in collection. I have heard that CCCS is the best route to manage the debt. I work for the government and CCCS is pretty much the only recognized debt management company. What should I do?

Answer: CCCS will not be able to help you with defaulted debts. Their debt management programs work to reduce interest and payments on open, active accounts.

These debts are about to age off your credit report and will no longer impact your history or score. It is also very likely that the debts are beyond the Statute of Limitations (SOL), the time frame to bring lawsuit. Typically the SOL starts from the date of last activity or last payment.

If you feel you want to repay these debts for moral reasons, then you need to contact the collection agency who currently owns the debt. You should be able to settle with them for about 10% to 20% — these collectors paid less than pennies on the dollar for 7 year old debts. Lump sum payments only. Don’t even consider payment plans — you restart the SOL.

Get any settlement in writing before you pay anything. Keep that agreement and your payment proof forever. Do not give the collector direct access to your bank account.

Question: How can I get a hit on my credit report from veterans affairs removed from my credit report?
They gave me $375 too much money a year ago (or so they say) for my GI Bill and asked for it back which I forgot to do. So it was forwarded to VA debt management and they reported it. I paid it off but the hit is still on my credit report. If I call and request it removed will they help me or tell me to screw off? What should I say when I call them?

Answer: You can call and very politely ask the collector to remove the item, but don’t be surprised if they say no. In that case, it will stay the balance of the 7 year reporting period. It is a legitimate item and part of your history.

Question: Struggling with debt?
I am struggling to keep up with my debt repayments, and a friend told me about debt management plans. Where can I find information on debt management in the UK?

Answer: Be very wary of using debt management companies. All they do is arrange a new loan, to be paid off over a longer time than your existing debts, possibly at a higher interest rate, and they add their own fees to what you owe. All of these things will increase the total amount you have to repay, and will keep you in debt and potentially struggling for much longer.

If you are struggling you can talk to the lenders yourself, and you may be able to renegotiate payments etc. Even if you do want to take out a long term loan to pay off some debts, you will almost certainly get a better deal if you do it yourself.

Question: How Much will my credit score improve?
I have about 5 Collections on my credit report and my husband has 9 Collections. We are working with a Debt Management Plan (Non Profit) and are paying monthly. Will our credit score improve or will it just stay the same since were giving the debt a new date each time we make our payment?

Answer: Although your credit score will be very low at the moment, it certainly will not get any worse so long as you are keeping up to date with your monthly repayments. Your score will increase slightly however it won’t have the boost that a healthy credit card has for example.

Question: How can I clear these bills?
I have mounting bills from my previous address which includes british gas yorkshire water ect. I have rung them all up and tried to arrange a payment schedule which I can afford but they are wanting a big deposit and bigger payments per month which I cannot afford as I don’t work. I’m a full time mum and my partners wage just pays the bills and rent ect. Is there any way I can get help to write off these debts or enter a debt management?

Answer: No. You need to find a job and pay them. Perhaps you could work from home to make extra money?

Question: Has anyone in the UK ever used a debt management company called Pay Plan, if so what do you think of them?
I was referred by a C.A.B debt advisor to this company, who will take a set amount from my income and distribute it to my creditors, I’m a bit wary of giving them my money as I have never heard of them and they do this for free.

Answer: The CAB will only direct you to a reputable company and if they are not charging you for their services at all then this is further proof that they have good intentions and are not in it for the money they can make out of you.
Other companies such as Baines and Ernst are better known but charge quite a lot of money for their ‘help’. This money could be better spent paying off your debts so don’t ever think about taking on a company that charges you at all.
I have never heard of Pay Plan but there are several non-profit-making companies that do a similar thing. Really, they are only doing things for you that you could do yourself, but their guidance and control make it easier to manage your money.
If you have any doubts just give them a ring and ask them to explain how they work and how they are funded. They are probably set up as a charity and they also probably get that request quite a lot so should be able to tell you everything you need to know.

A debt management company is where an individual turns when they feel too overwhelmed by their debt. They are looking to debt management because they are hanging on by the skin of their teeth or they have already fallen off the wagon. They can’t make their payments with their current income, so they have to find something other than bankruptcy that can relieve the issue.

When they turn to debt management, they may find that there are a number of services that are offered. The first of those programs is debt consolidation. This involves taking out a loan that consolidates all unsecured debt into one payment. For example, unsecured personal loans and credit cards can be combined. The interest rate can be lower and the payment can be lower than what all of the separate payments were before.

However, you have to be careful because this can have an impact on your credit rating in a number of ways. It is true that the idea behind debt consolidation is to keep your credit rating in tact, but you have to keep some things in mind.

Your credit rating

When it comes to debt consolidation, some people make the mistake of closing their accounts. It is actually not wise to close accounts for the fact that this lowers the amount of available credit that you have to your name. One of the things that contribute to your credit score is how much of your available credit you are using. If you have open accounts with balances of $0, that will have a positive impact. However, if you close your accounts and you have a debt consolidation loan that has no available credit, this can be harmful to your credit score.

Even if you’re not using debt consolidation and you are using another type of debt management, there may be a negative impact on your credit score. For example, you may not be able to take out a debt consolidation loan, so you need a debt management company to negotiate lower interest rates and a lower payment with your creditors. They may also be able to lower the amount of the debt. When this is done, this can affect your credit score negatively.

How does it help?

However, the repercussions that come with debt management are much less than that of bankruptcy. The consequences of debt management may last a period of three years, but bankruptcy can last ten years or more. So this is something that you should weigh when looking for a way to get out of your financial situation.

As for the benefits that you will experience in the present time, you will find that you will have more money in your pocket. Better yet, you can take that money and deposit it within a savings account. That way when you get back on your feet after your debt management program, you are able to have money in the bank that can help you out of a tough situation later on.

Nevertheless, you will have to work on building your credit back up after a debt management program. This means you’ll have to use your credit and make on-time payments. This is one reason why you don’t want to close accounts. You can take an existing account, charge a little on it, and then pay it off before your due date each month. This will allow the creditor to report positive marks on your credit report. This will also raise your score. Most of all, having to go through a debt management program can help you learn a very valuable lesson. After that, you shouldn’t find yourself having credit problems again.

Amy Nutt is a freelance writer who writes on a variety of financial topics including personal budgeting and debt consolidation. For more information about personal finance and credit counselling, ConsolidatedCredit.ca is a tremendous resource on the topic for Canadians.

Debt Management FAQ:

Question: Is it legal for a collections company in Canada to call from 000-000-0000?
I’m currently enrolled in a debt management program and informed the collections agencies dealing with my accounts. One company still called so I sent them a letter stating I wanted all further communication through the mail and not over the phone. They called me once tonight from *one* of the many numbers they use and didn’t leave a message. 15 minutes later I get a call from 000-000-0000 and no voicemail. I know it’s them – this company does shady things all the time. Is it legal for them to call me from a weird number like that?

Answer: Yes, it is legal. I used to work for a collections agency and 90% of the phone numbers that show up when they call are “dummy” lines anyway. You call the number back and it doesn’t work.

Also, in Canada even if you want further communication through mail and not calls, they legally can still call you. You have a debt, they can call and speak to you up to 3x a day. They can call as many times as they like if they do not speak to you. Even if you request communication through mail, they can call you. Many debt collection companies do not leave voicemails as 3rd party disclosure laws are quite strict

Question: Starting debt management plan, should I pay credit cards?
I am going to be starting a debt management plan with CCCS this month with a payment due on March 20th…should I pay my credit cards for the month? I am not sure I can afford the credit card payments and a debt management payment in the same month without skipping payments on utilities but I don’t want to ruin my credit either.

Answer: Call CCCS and ask your counselor how this should be handled.

Question: I’m thinking of getting a Debt Management plan with a company called ChurchwoodFinance. Are they any good?
They are asking for a payment up front, and then a monthly direct debit for 36 months.

Answer: Never go with a debt management company that demands payment upfront. This company will charge hefty fees to do what the Citizens Advice Bureau will do for free. Visit the citizens advice bureau in your town. Or you can contact your local united way, and they have free debt management help available.

Question: Can a wife claim 30% of her ex-husbands salary?
My son’s ex-wife is demanding 30% of his net salary. He is left to pay a huge mortgage plus debt management payments. After council tax, utility bills and running costs for his car which is essential to keep his job, he will be left with negative income. Can this be done?

Answer: She can demand all she wants, but there is no way she can actually take any amount of his salary. Now, if you are referring to something like child support…that’s slightly different. She still can’t take whatever she wants, but he will have to pay her money every month to help support any kids they may have together. As far as how much…a judge would make that determination, and most likely base it off his income.

Question: Is it legal to have a debt management plan and save on the side?
I mean to go on a debt management plan to reduce interest on your credit cards and in the mean time save on the side to clear the balances in one payment?

Answer: Yes.

Question: Give some debt management tips?
I have more than one debt but I am properly maintaining the payment. I need some debt management tips.

Answer: The first step is to stop buying things on credit. The second is to pay off the debt already incurred.

There are two schools of thought on how to pay off debt: 1) the highest interest 2) the lowest balance. Paying the highest interest debts will save money in the long run. Paying the lowest balance account will reduce the number of accounts owed and free up those payments for other debts sooner. Keep making the minimum payments and apply additional payments to either the highest interest or lowest balance account.

Question: Do I go for debt management?
I am about £10,000 in debt and it has really gone to far and I desperately need to get it sorted. Can anyone advise me whether or not debt management is the way forward and who would the best people to go with?

Answer: Google “CAB” or “citizen’s Advice Bureau”. This charity will contact all those that you are in debt to, to arrange a manageable repayment plan. Debt management companies are currently under investigation in the UK because they appear to be offering a solution which only succeeds in making financial problems worse. They charge for their advice (which can be obtained free from the CAB). They reschedule your debt – and they take a hefty commission (typically between 15%-30%), so creating a higher debt for you.

Question: What are my options after being canceled from my debt management program?
I was in a debt management program. I am $51k in debt. My last payment was in Oct. and I informed them that my job cut my hours 60% and delayed my payments for 2 months, but I never was able to get back into the program. I was dropped from the program in January. One of my creditors has now Charge off my loan and is on my credit report. I have not made payments to my other creditors and I am not sure what to do. I am avoiding their calls, because I feel completely lost. I thought about bankruptcy but my husband is self employed and I’m not sure how that will affect his business, and we own a home. I need some advice. I am sure others are experiencing the same or similar circumstances.

Answer: Book a meeting at your bank branch. The people there are nice and see people like this everyday. They will give you the best advice for your particular situation. Just try not to let it get you down too much, financial stress is a heavy one. Bankruptcy might be the best issue, but the bank employee will know if it will affect your husbands business.