Credit Counseling - Common Features of Debt Management Programs

Common Features of Debt Management Programs

After joining a DMP, the creditors will close the customer's accounts and restrict the accounts to future charges. The most common benefit of a DMP as advertised by most agencies is the consolidation of multiple monthly payments into one monthly payment, which is usually less than the sum of the individual payments previously paid by the customer. This is because credit cards banks will usually accept a lower monthly payment from a customer in a DMP than if the customer were paying the account on their own. Some DMPs advertise that payments can be cut by 50%, although a reduction of 10-20% is more common.

The second feature of a DMP is a reduction in the interest rates charged by creditors. A customer with a defaulted credit card account will often be paying an interest rate approaching 30%. Upon joining a DMP, credit card banks sometimes lower the annual percentage rates charged to 5-10%, and a few eliminate interest altogether. This reduction in interest allows the counseling agencies to advertise that their customers will be debt free in periods of 3–6 years, rather than the 20+ years that it would take to pay off a large amount of debt at high interest rates.

A third benefit offered by credit counseling agencies is the process of bringing delinquent accounts current. This is often called "reaging" or "curing" an account. This usually occurs after making a series of on-time payments through the debt management program as a show of good faith and commitment to completion of the program. For example, a client with an account with a monthly payment of $50 which has not been paid in two months might be considered by the creditor to be 60 days past due. After joining the DMP and making three consecutive monthly payments, the creditor could reage the account to reflect a current status. Thereafter the monthly payment due on the statements would be the monthly payment negotiated by the DMP, and the account report as current to the credit bureaus. This process does not eliminate the prior delinquencies from the credit bureau reports. It merely gives a fresh start and an opportunity for the client to begin building a positive credit history. Like all derogatory credit information, the passage of time will lessen the impact of the negative marks when credit scores are calculated. However, reaging an account will reset the clock on the statute of limitation (in most US states credit card debt expires worthless in 6 years). So by reaging an account, debt collectors get more time to sue you.

While private, for-profit debt/credit conseling exists also in European countries, frequently it is provided as a social service. Often their origin lies in either government, consumer associations or relief organizations. Examples include the Money Advise and Budgeting Service (private, but publicly funded) in Ireland, ‘Poradna’ (private, consumer associations and sponsoring banks) in the Czech Republic, Caritas (private charity) in some parts of Italy, or the local governments in Finland.

In many cases, consumers who are looking for debt relief may come across non-profit credit counseling companies. Generally, a company that brands itself as non-profit provides the same type of services that for-profit companies offer.

These debt counselors provide services such as: a) administrative help in accessing benefits, raising awareness (and championing enforcement) of regulations and in correctly filling out forms to apply for bankruptcy or debt restructuring arrangements; b) mediation between debtor and creditor; c) immediate financial support; d) provide over-indebted citizens with a perspective to regain control over their financial situation, acting as a listening ear and a helping hand.