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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.

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