Many universities, military bases, credit unions, and housing authorities operate non-profit debt management programs. Some of these institutions may charge a fee for their services. Also, creditors may only be willing to accept reduced payments if you are working with a reputable program to create a debt repayment plan.

 

Debt management programs typically have their clients close all of their credit card accounts and instead of paying each of their creditors individually each month, clients are expected to make a single payment directly to the debt management organization which disperses the payment among each of the creditors. Aside from the overall lower credit card consolidation payments, the primary benefit of debt management is that usually debt management companies are able to negotiate lower interest rates for their clients, which reduces the amount of time it takes to get out of debt.

 

However, debt management organizations have faced scrutiny because of their misuse of the term “non-profit” in regards to their organization. Just because an organization says it is a "non profit," there is no guarantee that the services provided are free, affordable, or even legitimate. In fact, some debt management organizations charge high hidden fees, or even urge consumers to make voluntary contributions that can cause a higher debt amount.

 

But realize that these types of companies are for the most part set up and funded by creditors in order to collect as much of the client’s debt as they can. It can be argued that it’s the job of these companies to coach clients into repaying as much of the debt back as possible. Do not be fooled by these companies non-profit status because all the profit they make after their operating expenses are met goes back to the original creditor. Also, when working with one of these companies, any debt help they offer will report as TPA (third party assistance) on your credit report. In some instances this notation can be just as damaging for your FICO score as filing for bankruptcy protection!

 

Consumer debt management can be a good debt relief option for some, but it is important to make sure that it is an appropriate debt relief option for you before signing up for a program.

 

Most debt management companies offer services through their local offices, the Internet, or over the phone. There is nothing wrong with remote service, but if possible, find an organization that offers in-person debt management. Your primary financial institution, local consumer protection agencies, and friends and family may be good sources of information and/or referrals.

Be wary of credit counseling organizations that:

• Charge high up-front or monthly fees for enrolling in their program.
• Pressure you to make "voluntary contributions," which is another name for fees.
• Refuse to send you free information about the services they provide without requiring you to provide personal financial information, such as credit card account numbers and balances.
• Try to enroll you in a debt management plan (DMP) without spending time reviewing your financial situation.
• Offer to enroll you in a DMP without teaching you budgeting and money management skills
• Demand that you make payments into a DMP before your creditors have accepted you into the program.

Remember, in a consumer debt management program, clients will repay 100% of their outstanding debt, plus interest. Clients do typically have their interest rates lowered, but it is usually to a set rate defined by their individual creditors because it is the creditors themselves, not the debt management agencies that determine the interest rates and payment amounts. All the agency does is organize and distribute the client’s monthly payment to creditors.

 

Consumer debt management programs usually have a high dropout rate. That means only a fraction of people who sign up with an agency tend to stay in the program until they completely get out of debt. While some clients choose to drop out and repay the remaining debts themselves, this high dropout rate is also caused by individuals with overwhelming debt who realize that even with a consolidated monthly payment at a lower interest rate, it will still be nearly impossible to find true debt relief because they typically can no longer keep up with the creditor-approved monthly payments. Clients can also get kicked out of a debt management program for missing a payment. Additionally, the law demands that previous debt management clients who have fallen out the program for whatever reasons wait one year before signing up for another program. At that point, the only option for many previous clients is bankruptcy.