How to Outsmart Debt Management Companies STAFF PICK

Kara O'Donnell

Written by

Bankruptcy Attorney

Contributor Level 14

Posted almost 5 years ago. 3 helpful votes

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1

What do they do? How do they get paid?

"Much like the Bird Flu Virus, debt management companies and their ads seem to have come out of nowhere and taken over the airwaves. Basically, the companies have you sign up and you agree to pay them for their services in attempting to reduce your debt (usually a credit card) balance or interest rate. They offer no guarantee as to likelihood of success as it depends solely upon the whim of the credit card guy on the other end of the phone. You are told to STOP paying your credit card bills and to send that money instead to the debt management company. The company will then hold it in an account while they call your creditors and negotiate better deals for you. If they are able to get a low payoff on a card, for example, they will pay it off using the funds in your account. Now, the problem lies in that the company doesn't ONLY withdraw funds out of your account to pay your debtors, but that it also withdraws funds to pay ITSELF for the work it is performing on your behalf.

2

Why shouldn't I use Debt Management companies?

First, their fees can quickly escalate and usually are far more than what the customer expects. Second, there are NON-PROFIT companies that perform this service for little to no cost. Simply search CONSUMER CREDIT COUNSELING and NON-PROFIT in your area. (In MA, it is Consumer Credit Counseling Service of Southern New England) Third, you can DO THIS YOURSELF and for FREE. Just call your debtors and advise that you are in tough financial shape and can't make payments as scheduled. Ask for a rate reduction or for a payoff of your whole balance at a discounted rate. (Ask if they will accept a lump sum payment of half of your balance, for starters.) Put your negotiation skills to work. If need be, and if it is accurate, tell them you may need to file bankruptcy if you can't get some help. Your credit card creditors may be willing to take a portion of the entire debt now rather than have you discharge it all in bankruptcy court and they get nothing.

3

Is it true that some people end up owing MORE after they use a Debt Management Company?

Yes! One can end up owing MORE money than she did before she hired the debt management company for the following reasons: a) They were unable to get concessions from the creditors, b) Their fees for each of the services (calls, letters, emails) were too high c) They "churned" the account. (Churning is a term often used to describe actions of unscrupulous stockbrokers whom buy and sell client stocks merely to get the per-transaction fee for each action.) And, because they are paid for each and every action they take, they profit almost every time they touch your file. d) All of the above.

4

What is an easy way out of high credit card debt then?

In summary, there is no easy way out of high balance consumer debt. If you are fortunate enough to be employed and to be able to meet and maybe even PAY DOWN balances then a renegotiation strategy with creditors may work for you. However, if you are falling more and more behind every month and see no way out, it may be time to start looking into bankruptcy options. Bankruptcy can wipe out all credit card debt and provide a fresh start. However, it is not a decision to be made lightly and one must weigh the pros with the cons before arriving at a decision.

Additional Resources

Law Office of Kara O'Donnell, MA Attorney

The Quincy Bankruptcy Blog

U.S. Courts - Bankruptcy Basics

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